EXHIBIT 99.2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Liberty Media Corporation:
We have audited the accompanying consolidated balance sheets of Liberty Media
Corporation and subsidiaries as of December 31, 2004 and 2003, and the related
consolidated statements of operations, comprehensive earnings (loss),
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2004. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Liberty Media
Corporation and subsidiaries as of December 31, 2004 and 2003, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2004, in conformity with U.S. generally accepted
accounting principles.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the internal
control over financial reporting of Liberty Media Corporation as of December 31,
2004, based on the criteria established in INTERNAL CONTROL--INTEGRATED
FRAMEWORK issued by the Committee of Sponsoring Organizations of the Treadway
Commission ("COSO"), and our report dated March 14, 2005 expressed an
unqualified opinion on management's assessment of, and the effective operation
of, internal control over financial reporting.
KPMG LLP
Denver, Colorado
March 14, 2005, except for
Note 5 and Note 18, which are
as of December 15, 2005
1
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2004 and 2003
2004* 2003*
-------- --------
amounts in millions
Assets
Current assets:
Cash and cash equivalents $ 1,387 2,966
Trade and other receivables, net 1,035 946
Inventory, net 712 588
Prepaid expenses and program rights 562 464
Derivative instruments (note 7) 827 543
Other current assets 53 347
-------- --------
Total current assets 4,576 5,854
-------- --------
Investments in available-for-sale securities and other cost investments
(note 6) 21,847 19,566
Long-term derivative instruments (note 7) 1,601 3,247
Investments in affiliates, accounted for using the equity method
(note 8) 784 745
Property and equipment, at cost 1,637 1,474
Accumulated depreciation (504) (355)
-------- --------
1,133 1,119
-------- --------
Intangible assets not subject to amortization (note 2):
Goodwill 6,938 6,780
Trademarks 2,385 2,385
-------- --------
9,323 9,165
-------- --------
Intangible assets subject to amortization, net (note 2) 4,436 4,815
Other assets, at cost, net of accumulated amortization 765 573
Assets of discontinued operations (note 5) 5,716 9,141
-------- --------
Total assets $ 50,181 54,225
======== ========
- -------------
* See note 5.
(continued)
2
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2004 and 2003
2004 2003*
-------- --------
amounts in millions
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 424 390
Accrued interest payable 143 152
Other accrued liabilities 645 594
Accrued stock compensation 235 190
Program rights payable 200 177
Derivative instruments (note 7) 1,179 854
Other current liabilities 285 145
-------- --------
Total current liabilities 3,111 2,502
-------- --------
Long-term debt (note 9) 8,566 9,417
Long-term derivative instruments (note 7) 1,812 1,756
Deferred income tax liabilities (note 10) 9,701 9,729
Other liabilities 801 355
Liabilities of discontinued operations (note 5) 1,305 1,331
-------- --------
Total liabilities 25,296 25,090
-------- --------
Minority interests in equity of subsidiaries 299 293
Stockholders' equity (note 11):
Preferred stock, $.01 par value. Authorized 50,000,000 shares; no
shares issued -- --
Series A common stock $.01 par value. Authorized 4,000,000,000
shares; issued and outstanding 2,678,895,158 shares at December 31,
2004 and 2,669,835,166 shares at December 31, 2003 27 27
Series B common stock $.01 par value. Authorized 400,000,000 shares; issued
131,062,825 shares at December 31, 2004 and 217,100,515
shares at December 31, 2003 1 2
Additional paid-in capital 33,765 39,001
Accumulated other comprehensive earnings, net of taxes ("AOCE") (note 15) 4,215 3,241
AOCE from discontinued operations 12 (40)
Unearned compensation (64) (98)
Accumulated deficit (13,245) (13,291)
-------- --------
24,711 28,842
Series B common stock held in treasury, at cost (10,000,000 shares at
December 31, 2004) (125) --
-------- --------
Total stockholders' equity 24,586 28,842
-------- --------
Commitments and contingencies (note 17)
Total liabilities and stockholders' equity $ 50,181 54,225
======== ========
- --------------
* See note 5.
See accompanying notes to consolidated financial statements.
3
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2004, 2003 and 2002
2004* 2003* 2002*
------- ------- -------
amounts in millions,
except per share amounts
Revenue:
Net sales from electronic retailing $ 5,687 1,973 --
Communications and programming services 1,364 1,257 1,266
------- ------- -------
7,051 3,230 1,266
------- ------- -------
Operating costs and expenses:
Cost of sales--electronic retailing services 3,594 1,258 --
Operating 1,356 860 621
Selling, general and administrative ("SG&A") 662 387 328
Stock compensation--SG&A (note 2) 98 (91) (46)
Litigation settlement (42) -- --
Depreciation 172 127 100
Amortization 486 267 174
Impairment of long-lived assets (note 2) -- 1,362 103
------- ------- -------
6,326 4,170 1,280
------- ------- -------
Operating income (loss) 725 (940) (14)
Other income (expense):
Interest expense (615) (508) (367)
Dividend and interest income 131 164 179
Share of earnings (losses) of affiliates, net (note 8) 15 7 (57)
Realized and unrealized gains (losses) on derivative
instruments, net (note 7) (1,284) (661) 2,127
Gains (losses) on dispositions, net (notes 6, 8 and 11) 1,406 1,126 (538)
Nontemporary declines in fair value of investments
(note 6) (129) (22) (5,806)
Other, net (25) (53) (5)
------- ------- -------
(501) 53 (4,467)
------- ------- -------
Earnings (loss) from continuing operations before
income taxes and minority interest 224 (887) (4,481)
Income tax benefit (expense) (note 10) (119) (342) 1,481
Minority interests in losses (earnings) of subsidiaries (5) -- 27
------- ------- -------
Earnings (loss) from continuing operations before
cumulative effect of accounting change 100 (1,229) (2,973)
Earnings (loss) from discontinued operations, net of taxes
(note 5) (54) 7 (849)
Cumulative effect of accounting change, net of taxes (note 2) -- -- (1,508)
------- ------- -------
Net earnings (loss) $ 46 (1,222) (5,330)
======= ======= =======
Earnings (loss) per common share (note 2):
Basic and diluted earnings (loss) from continuing
operations $ .04 (.44) (1.15)
Discontinued operations (.02) -- (.33)
Cumulative effect of accounting change, net of taxes -- -- (.58)
------- ------- -------
Basic and diluted net earnings (loss) $ .02 (.44) (2.06)
======= ======= =======
Number of common shares outstanding 2,856 2,748 2,590
======= ======= =======
- -------------
* See note 5.
See accompanying notes to consolidated financial statements.
4
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS (LOSS)
Years ended December 31, 2004, 2003 and 2002
2004* 2003* 2002*
------- ------- -------
amounts in millions
Net earnings (loss) $ 46 (1,222) (5,330)
------- ------- -------
Other comprehensive earnings (loss), net of taxes (note 15):
Foreign currency translation adjustments 23 35 68
Unrealized holding gains (losses) arising during the
period 1,490 3,341 (4,153)
Recognition of previously unrealized losses (gains)
on available-for-sale securities, net (488) (628) 3,598
Other comprehensive earnings (loss) from discontinued
operations (note 5) (55) 227 (127)
------- ------- -------
Other comprehensive earnings (loss) 970 2,975 (614)
------- ------- -------
Comprehensive earnings (loss) $ 1,016 1,753 (5,944)
======= ======= =======
- -------------
* See note 5.
See accompanying notes to consolidated financial statements.
5
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 2004, 2003 and 2002
COMMON STOCK ADDITIONAL AOCE FROM TOTAL
PREFERRED ----------------- PAID-IN DISCONTINUED UNEARNED ACCUMULATED TREASURY STOCKHOLDERS'
STOCK SERIES A SERIES B CAPITAL AOCE OPERATIONS COMPENSATION DEFICIT STOCK EQUITY
--------- -------- -------- ---------- ------ ------------ ------------ ----------- -------- -------------
amounts in millions
Balance at
January 1, 2002 $ -- 24 2 35,996 980 (140) -- (6,739) -- 30,123
Net loss -- -- -- -- -- -- -- (5,330) -- (5,330)
Other comprehensive
loss -- -- -- -- (487) (127) -- -- -- (614)
Issuance of common
stock for
acquisitions -- -- -- 195 -- -- -- -- -- 195
Issuance of common
stock pursuant
to rights offering -- 1 -- 617 -- -- -- -- -- 618
Purchases of Series A
common stock -- -- -- (281) -- -- -- -- -- (281)
Series A common stock
put options, net of
cash received
(note 11) -- -- -- (29) -- -- -- -- -- (29)
-------- ----- ---- ------- ------ ------ ------ -------- ----- -------
Balance at
December 31, 2002 -- 25 2 36,498 493 (267) -- (12,069) -- 24,682
Net loss -- -- -- -- -- -- -- (1,222) -- (1,222)
Other comprehensive
earnings -- -- -- -- 2,748 227 -- -- -- 2,975
Issuance of Series A
common stock for
acquisitions -- 2 -- 2,654 -- -- -- -- -- 2,656
Issuance of Series A
common stock for cash -- -- -- 141 -- -- -- -- -- 141
Purchases of Series A
common stock -- -- -- (437) -- -- -- -- -- (437)
Issuance of restricted
stock -- -- -- 102 -- -- (102) -- -- --
Amortization of
deferred compensation -- -- -- -- -- -- 4 -- -- 4
Series A common stock
put options, net of
cash received (note11) -- -- -- 37 -- -- -- -- -- 37
Gain in connection with
the issuance of stock
of a subsidiary -- -- -- 6 -- -- -- -- -- 6
-------- ----- ---- ------- ------ ------ ------ -------- ----- -------
Balance at
December 31, 2003 -- 27 2 39,001 3,241 (40) (98) (13,291) -- 28,842
Net earnings -- -- -- -- -- -- -- 46 -- 46
Other comprehensive
earnings (loss) -- -- -- -- 1,025 (55) -- -- -- 970
Issuance of Series A
common stock for
acquisitions -- -- -- 152 -- -- -- -- -- 152
Issuance of Series A
common stock in
exchange for
Series B common
stock (note 11) -- 1 (1) 125 -- -- -- -- (125) --
Acquisition of
Series A common
stock (note 11) -- (1) -- (1,016) -- -- -- -- -- (1,017)
Amortization of
deferred
compensation -- -- -- -- -- -- 31 -- -- 31
Distribution to
stockholders for
spin off of
Liberty Media
International
("LMI") (note 5) -- -- -- (4,512) (51) 107 -- -- -- (4,456)
Stock compensation
for Liberty options
held by LMI employees
(note 13) -- -- -- (4) -- -- -- -- -- (4)
Stock compensation
for LMI options held
by Liberty employees
(note 13) -- -- -- 17 -- -- -- -- -- 17
Cancellation of
restricted stock -- -- -- (3) -- -- 3 -- -- --
Other -- -- -- 5 -- -- -- -- -- 5
-------- ----- ---- ------- ------ ------ ------ -------- ----- -------
Balance at
December 31, 2004 $ -- 27 1 33,765 4,215 12 (64) (13,245) (125) 24,586
======== ===== ==== ======= ====== ====== ====== ======== ===== =======
See accompanying notes to consolidated financial statements.
6
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2004, 2003 and 2002
2004* 2003* 2002*
------- ------ ------
amounts in millions
(see note 3)
Cash flows from operating activities:
Earnings (loss) from continuing operations $ 100 (1,229) (4,481)
Adjustments to reconcile earnings (loss) from continuing
operations to net cash provided (used) by operating activities:
Cumulative effect of accounting change, net of taxes -- -- 1,508
Depreciation and amortization 658 394 274
Impairment of long-lived assets -- 1,362 103
Stock compensation 98 (91) (46)
Payments of stock compensation (10) (360) (117)
Noncash interest expense 96 75 12
Share of losses (earnings) of affiliates, net (15) (7) 57
Nontemporary decline in fair value of investments 129 22 5,806
Realized and unrealized losses (gains) on derivative
instruments, net 1,284 661 (2,127)
Losses (gains) on disposition of assets, net (1,406) (1,126) 538
Minority interests in earnings (losses) of subsidiaries 5 -- (27)
Deferred income tax expense (benefit) (233) 269 (1,489)
Other noncash charges 21 70 19
Changes in operating assets and liabilities, net of the effect
of acquisitions and dispositions:
Receivables (51) (176) (33)
Inventory (124) (14) --
Prepaid expenses and other current assets (344) (149) (83)
Payables and other current liabilities 625 186 9
------- ------- -------
Net cash provided (used) by operating activities 833 (113) (77)
------- ------- -------
Cash flows from investing activities:
Cash proceeds from dispositions 479 2,443 981
Premium proceeds from origination of derivatives 193 763 521
Net proceeds from settlement of derivatives 322 1,172 410
Investments in and loans to equity affiliates (30) (48) (65)
Investments in and loans to cost investees (930) (2,509) (228)
Cash paid for acquisitions, net of cash acquired (93) (711) (44)
Capital expended for property and equipment (177) (151) (91)
Net sales of short term investments 272 95 148
Repayments of notes receivable from LMI 117 -- --
Other investing activities, net (14) 9 21
------- ------- -------
Net cash provided by investing activities 139 1,063 1,653
------- ------- -------
Cash flows from financing activities:
Borrowings of debt -- 4,152 170
Repayments of debt (1,006) (3,073) (726)
Purchases of Liberty Series A common stock (547) (437) (281)
Repurchases of subsidiary common stock (171) -- --
Proceeds from issuance of common stock -- 141 618
Other financing activities, net 37 (42) 2
------- ------- -------
Net cash provided (used) by financing activities (1,687) 741 (217)
------- ------- -------
Net cash provided to discontinued operations (note 3) (864) (875) (1,250)
------- ------- -------
Net increase (decrease) in cash and cash equivalents (1,579) 816 109
Cash and cash equivalents at beginning of year 2,966 2,150 2,041
------- ------- -------
Cash and cash equivalents at end of year $ 1,387 2,966 2,150
======= ======= =======
- -------------
* See note 5.
See accompanying notes to consolidated financial statements.
7
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004, 2003 and 2002
(1) BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Liberty Media Corporation and its controlled subsidiaries ("Liberty" or the
"Company," unless the context otherwise requires). All significant
intercompany accounts and transactions have been eliminated in
consolidation.
Liberty is a holding company which, through its controlling and
noncontrolling ownership of interests in subsidiaries and other companies,
is primarily engaged in the electronic retailing, media, communications and
entertainment industries in the United States, Europe and Asia. In
addition, companies in which Liberty owns interests are engaged in, among
other things, (i) interactive commerce via the Internet, television and
telephone, (ii) domestic cable and satellite broadband services, and (iii)
telephony and other technology ventures. Prior to the June 7, 2004 spin off
of Liberty Media International, Inc., Liberty was also engaged in
international broadband distribution of video, voice and data services. See
note 5.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash equivalents consist of investments which are readily convertible into
cash and have maturities of three months or less at the time of
acquisition.
RECEIVABLES
Receivables are reflected net of an allowance for doubtful accounts. Such
allowance aggregated $65 million and $80 million at December 31, 2004 and
2003, respectively. A summary of activity in the allowance for doubtful
accounts is as follows:
ADDITIONS
BALANCE --------------------------- BALANCE
BEGINNING CHARGED DEDUCTIONS- END OF
OF YEAR TO EXPENSE ACQUISITIONS WRITE-OFFS YEAR
--------- ---------- ------------ ----------- ---------
amounts in millions
2004 $80 20 -- (35) 65
=== === === === ===
2003 $18 16 62 (16) 80
=== === === === ===
2002 $ 6 19 1 (8) 18
=== === === === ===
INVENTORY
Inventory, consisting primarily of products held for sale, is stated at the
lower of cost or market. Cost is determined by the average cost method,
which approximates the first-in, first-out method.
A summary of activity in the inventory obsolescence account is as follows:
ADDITIONS
BALANCE --------------------------- BALANCE
BEGINNING CHARGED DEDUCTIONS- END OF
OF YEAR TO EXPENSE ACQUISITIONS WRITE-OFFS YEAR
--------- ---------- ------------ ----------- ---------
amounts in millions
2004 $93 54 -- (59) 88
=== === === === ===
2003 $-- 19 93 (19) 93
=== === === === ===
8
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
PROGRAM RIGHTS
Prepaid program rights are amortized on a film-by-film basis over the
anticipated number of exhibitions. Committed program rights and program
rights payable are recorded at the estimated cost of the programs when the
film is available for airing less prepayments. These amounts are amortized
on a film-by-film basis over the anticipated number of exhibitions.
INVESTMENTS
All marketable equity and debt securities held by the Company are
classified as available-for-sale and are carried at fair value ("AFS
Securities"). Unrealized holding gains and losses on AFS Securities are
carried net of taxes as a component of accumulated other comprehensive
earnings in stockholders' equity. Realized gains and losses are determined
on an average cost basis. Other investments in which the Company's
ownership interest is less than 20% and are not considered marketable
securities are carried at cost.
For those investments in affiliates in which the Company has the ability to
exercise significant influence, the equity method of accounting is used.
Under this method, the investment, originally recorded at cost, is adjusted
to recognize the Company's share of net earnings or losses of the
affiliates as they occur rather then as dividends or other distributions
are received, limited to the extent of the Company's investment in,
advances to and commitments for the investee. The Company's share of net
earnings or loss of affiliates also includes any other-than-temporary
declines in fair value recognized during the period.
Changes in the Company's proportionate share of the underlying equity of a
subsidiary or equity method investee, which result from the issuance of
additional equity securities by such subsidiary or equity investee, are
recognized as increases or decreases in stockholders' equity.
The Company continually reviews its investments to determine whether a
decline in fair value below the cost basis is other than temporary
("nontemporary"). The primary factors the Company considers in its
determination are the length of time that the fair value of the investment
is below the Company's carrying value; and the financial condition,
operating performance and near term prospects of the investee. In addition,
the Company considers the reason for the decline in fair value, be it
general market conditions, industry specific or investee specific;
analysts' ratings and estimates of 12 month share price targets for the
investee; changes in stock price or valuation subsequent to the balance
sheet date; and the Company's intent and ability to hold the investment for
a period of time sufficient to allow for a recovery in fair value. If the
decline in fair value is deemed to be nontemporary, the cost basis of the
security is written down to fair value. In situations where the fair value
of an investment is not evident due to a lack of a public market price or
other factors, the Company uses its best estimates and assumptions to
arrive at the estimated fair value of such investment. The Company's
assessment of the foregoing factors involves a high degree of judgment and
accordingly, actual results may differ materially from the Company's
estimates and judgments. Writedowns for cost investments and AFS Securities
are included in the consolidated statements of operations as nontemporary
declines in fair values of investments. Writedowns for equity method
investments are included in share of earnings (losses) of affiliates.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company uses various derivative instruments including equity collars,
narrow-band collars, put spread collars, written put and call options, bond
swaps and interest rate swaps to manage fair value and cash flow risk
associated with many of its investments and some of its variable rate debt.
Liberty's derivative instruments are executed with counterparties who are
well known major financial institutions. While Liberty believes these
derivative instruments effectively manage the risks highlighted above, they
are subject to counterparty credit risk. Counterparty credit risk is the
risk that the counterparty is unable to perform under the terms of the
derivative
9
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
instrument upon settlement of the derivative instrument. To protect itself
against credit risk associated with these counterparties the Company
generally:
o executes its derivative instruments with several different
counterparties, and
o executes equity derivative instrument agreements which contain a
provision that requires the counterparty to post the "in the money"
portion of the derivative instrument into a cash collateral account
for the Company's benefit, if the respective counterparty's credit
rating for its senior unsecured debt were to reach certain levels,
generally a rating that is below Standard & Poor's rating of A- and/or
Moody's rating of A3.
Due to the importance of these derivative instruments to its risk
management strategy, Liberty actively monitors the creditworthiness of each
of its counterparties. Based on its analysis, the Company currently
considers nonperformance by any of its counterparties to be unlikely.
Liberty accounts for its derivatives pursuant to Statement of Financial
Accounting Standards No. 133 "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES" ("Statement 133"). All derivatives, whether designated
in hedging relationships or not, are recorded on the balance sheet at fair
value. If the derivative is designated as a fair value hedge, the changes
in the fair value of the derivative and of the hedged item attributable to
the hedged risk are recognized in earnings. If the derivative is not
designated as a hedge, changes in the fair value of the derivative are
recognized in earnings.
During 2002, the only derivative instruments designated as hedges were the
Company's equity collars, which were designated as fair value hedges.
Effective December 31, 2002, the Company elected to dedesignate its equity
collars as fair value hedges. Such election had no effect on the Company's
financial position at December 31, 2002 or its results of operations for
the year ended December 31, 2002. Subsequent to December 31, 2002, changes
in the fair value of the Company's AFS Securities that previously had been
reported in earnings due to the designation of equity collars as fair value
hedges are reported as a component of other comprehensive earnings (loss)
on the Company's consolidated balance sheet. Changes in the fair value of
the equity collars continue to be reported in earnings.
The fair value of derivative instruments is estimated using third party
estimates or the Black-Scholes model. The Black-Scholes model incorporates
a number of variables in determining such fair values, including expected
volatility of the underlying security and an appropriate discount rate. The
Company obtains volatility rates from independent sources based on the
expected volatility of the underlying security over the term of the
derivative instrument. The volatility assumption is evaluated annually to
determine if it should be adjusted, or more often if there are indications
that it should be adjusted. A discount rate is obtained at the inception of
the derivative instrument and updated each reporting period based on the
Company's estimate of the discount rate at which it could currently settle
the derivative instrument. Considerable management judgment is required in
estimating the Black-Scholes variables. Actual results upon settlement or
unwinding of derivative instruments may differ materially from these
estimates.
PROPERTY AND EQUIPMENT
Property and equipment, including significant improvements, is stated at
cost. Depreciation is computed using the straight-line method using
estimated useful lives of 3 to 20 years for support equipment and 10 to 40
years for buildings and improvements.
INTANGIBLE ASSETS
ADOPTION OF STATEMENT NO. 142
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142, GOODWILL AND OTHER INTANGIBLE Assets
("Statement 142"). Statement 142 requires that goodwill and other
intangible assets with indefinite useful lives (collectively, "indefinite
lived
10
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
intangible assets") no longer be amortized, but instead be tested for
impairment at least annually in accordance with the provisions of Statement
142. Equity method goodwill is also no longer amortized, but continues to
be considered for impairment under Accounting Principles Board Opinion No.
18. Statement 142 also requires that intangible assets with estimable
useful lives be amortized over their respective estimated useful lives to
their estimated residual values, and reviewed for impairment in accordance
with Statement of Financial Accounting Standards No. 144, ACCOUNTING FOR
THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS ("Statement 144").
Statement 142 required the Company to perform an assessment of whether
there was an indication that goodwill was impaired as of the date of
adoption. To accomplish this, the Company identified its reporting units
and determined the carrying value of each reporting unit by assigning the
assets and liabilities, including the existing goodwill and intangible
assets, to those reporting units as of the date of adoption. Statement 142
requires the Company to consider equity method affiliates as separate
reporting units. As a result, a portion of the Company's enterprise-level
goodwill balance was allocated to various reporting units which included a
single equity method investment as its only asset. This allocation is
performed for goodwill impairment testing purposes only and does not change
the reported carrying value of the investment. However, to the extent that
all or a portion of an equity method investment which is part of a
reporting unit containing allocated goodwill is disposed of in the future,
the allocated portion of goodwill will be relieved and included in the
calculation of the gain or loss on disposal.
The Company determined the fair value of its reporting units using
independent appraisals, public trading prices and other means. The Company
then compared the fair value of each reporting unit to the reporting unit's
carrying amount. To the extent a reporting unit's carrying amount exceeded
its fair value, the Company performed the second step of the transitional
impairment test. In the second step, the Company compared the implied fair
value of the reporting unit's goodwill, determined by allocating the
reporting unit's fair value to all of its assets (recognized and
unrecognized) and liabilities in a manner similar to a purchase price
allocation, to its carrying amount, both of which were measured as of the
date of adoption.
In situations where the implied fair value of a reporting unit's goodwill
was less than its carrying value, Liberty recorded a transition impairment
charge. The Company recognized a $1,508 million transitional impairment
loss, net of taxes of $24 million, as the cumulative effect of a change in
accounting principle in 2002. The foregoing transitional impairment loss
includes an adjustment of $61 million for the Company's proportionate share
of transition adjustments that its equity method affiliates recorded.
GOODWILL
Changes in the carrying amount of goodwill for the year ended December
31, 2004 are as follows:
STARZ
ENTERTAINMENT
QVC, INC. GROUP LLC OTHER(3) TOTAL
--------- ------------- -------- ------
amounts in millions
Balance at December 31, 2003 $3,889 1,383 1,508 6,780
Acquisitions(1) 39 -- -- 39
Other(2) 120 -- (1) 119
------ ------ ------ ------
Balance at December 31, 2004 $4,048 1,383 1,507 6,938
====== ====== ====== ======
-------------
(1) During the year ended December 31, 2004, QVC, Inc. ("QVC") completed
the buyout of a minority partner for aggregate cash consideration of
$92 million. In connection with this
11
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
buyout, QVC recorded additional goodwill of $39 million, which
represents the excess of the purchase price over the carrying value of
the minority interest.
(2) Other activity for QVC relates primarily to the repurchase of QVC
stock held by employees of QVC. The differences between the carrying
value of the minority interest acquired and the purchase price is
recorded as goodwill.
(3) As noted above, the Company's enterprise-level goodwill of $1,377
million is allocable to reporting units, whether they are consolidated
subsidiaries or equity method investments. Total enterprise-level
goodwill at December 31, 2004, which is included in Other, is
allocated as follows (amounts in millions).
<Table>
<Caption>
ALLOCABLE
ENTITY GOODWILL
------ ---------
QVC $1,220
Courtroom Television Network, LLC ("Court TV") 124
GSN, LLC ("GSN") 17
Other 16
------
$1,377
======
Starz Entertainment Group LLC ("Starz Entertainment") obtained an
independent third party valuation in connection with its 2003 annual
year-end evaluation of the recoverability of its goodwill. The result of
this valuation, which was based on a discounted cash flow analysis of
projections prepared by the management of Starz Entertainment, indicated
that the fair value of this reporting unit was less than its carrying
value. This reporting unit fair value was then used to calculate an implied
value of the goodwill (including $1,195 million of allocated
enterprise-level goodwill) related to Starz Entertainment. The $1,352
million excess of the carrying amount of the goodwill over its implied
value was recorded as an impairment charge in the fourth quarter of 2003.
The reduction in the value of Starz Entertainment reflected in the third
party valuation is believed to be attributable to a number of factors.
Those factors include the reliance placed in that valuation on projections
by management reflecting a lower rate of revenue growth compared to earlier
projections based, among other things, on the possibility that revenue
growth may be negatively affected by (1) a reduction in the rate of growth
in total digital video subscribers and in the subscription video on demand
business as a result of cable operators' increased focus on the marketing
and sale of other services, such as high speed Internet access and
telephony, and the uncertainty as to the success of marketing efforts by
distributors of Starz Entertainment's services and (2) lower per subscriber
rates under a new affiliation agreement with Comcast.
In August 2002, Liberty purchased 38% of the common equity and 85% of the
voting power of OpenTV Corp. ("OpenTV"), which when combined with Liberty's
previous ownership interest in OpenTV, brought Liberty's total ownership to
41% of the equity and 86% of the voting power of OpenTV. During the period
between the execution of the purchase agreement in May 2002 and the
consummation of the acquisition in August 2002, OpenTV disclosed that it
was lowering its revenue and cash flow projections for 2002 and extending
the time before it would be cash flow positive. As a result, OpenTV wrote
off all of its separately recorded goodwill. In light of the announcement
by OpenTV and the adverse impact on its stock price, as well as other
negative factors arising in its industry sector, Liberty determined that
the goodwill initially recorded in purchase accounting ($92 million) was
not recoverable. This assessment is supported by an appraisal performed by
an independent third party. Accordingly, Liberty recorded an impairment
charge for the entire amount of the goodwill during the third quarter of
2002. In addition to the goodwill impairment related to OpenTV, the Company
recorded 2002 impairments of $11 million related to other consolidated
subsidiaries.
12
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
INTANGIBLE ASSETS SUBJECT TO AMORTIZATION
Intangible assets subject to amortization are comprised of the following:
DECEMBER 31, 2004 DECEMBER 31, 2003
---------------------------------------- --------------------------------------
GROSS NET GROSS NET
CARRYING ACCUMULATED CARRYING CARRYING ACCUMULATED CARRYING
AMOUNT AMORTIZATION AMOUNT AMOUNT AMORTIZATION AMOUNT
-------- ------------ -------- -------- ------------ --------
amounts in millions
Distribution rights $2,618 (589) 2,029 2,580 (375) 2,205
Customer relationships 2,347 (224) 2,123 2,336 (56) 2,280
Other 622 (338) 284 577 (247) 330
------ ------ ------ ------ ------ ------
Total $5,587 (1,151) 4,436 5,493 (678) 4,815
====== ====== ====== ====== ====== ======
Amortization of intangible assets with finite useful lives was $486
million, $267 million and $175 million for the years ended December 31,
2004, 2003 and 2002, respectively. Based on its current amortizable
intangible assets, Liberty expects that amortization expense will be as
follows for the next five years (amounts in millions):
2005 $ 468
2006 $ 434
2007 $ 390
2008 $ 358
2009 $ 337
IMPAIRMENT OF LONG-LIVED ASSETS
Statement 144 requires that the Company periodically review the carrying
amounts of its property and equipment and its intangible assets (other than
goodwill) to determine whether current events or circumstances indicate
that such carrying amounts may not be recoverable. If the carrying amount
of the asset is greater than the expected undiscounted cash flows to be
generated by such asset, an impairment adjustment is to be recognized. Such
adjustment is measured by the amount that the carrying value of such assets
exceeds their fair value. The Company generally measures fair value by
considering sale prices for similar assets or by discounting estimated
future cash flows using an appropriate discount rate. Considerable
management judgment is necessary to estimate the fair value of assets.
Accordingly, actual results could vary significantly from such estimates.
Assets to be disposed of are carried at the lower of their financial
statement carrying amount or fair value less costs to sell.
MINORITY INTERESTS
Recognition of minority interests' share of losses of subsidiaries is
generally limited to the amount of such minority interests' allocable
portion of the common equity of those subsidiaries. Further, the minority
interests' share of losses is not recognized if the minority holders of
common equity of subsidiaries have the right to cause the Company to
repurchase such holders' common equity.
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company is the United States ("U.S.")
dollar. The functional currency of the Company's foreign operations
generally is the applicable local currency for each foreign subsidiary and
foreign equity method investee. Assets and liabilities of foreign
subsidiaries and foreign equity investees are translated at the spot rate
in effect at the applicable reporting date, and the consolidated statements
of operations and the Company's share of the results of operations of its
foreign equity affiliates are translated at the average exchange rates in
effect during the applicable period. The resulting unrealized cumulative
translation adjustment, net of applicable income taxes, is recorded as a
component of accumulated other comprehensive earnings in stockholders'
equity.
13
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
Transactions denominated in currencies other than the functional currency
are recorded based on exchange rates at the time such transactions arise.
Subsequent changes in exchange rates result in transaction gains and losses
which are reflected in the accompanying consolidated statements of
operations and comprehensive earnings as unrealized (based on the
applicable period-end exchange rate) or realized upon settlement of the
transactions.
REVENUE RECOGNITION
Revenue is recognized as follows:
o Revenue from electronic retail sales is recognized at the time of
shipment to customers. An allowance for returned merchandise is
provided as a percentage of sales based on historical experience. The
total reduction in sales due to returns for the year ended December
31, 2004 and the four months ended December 31, 2003 aggregated $1,089
million and $340 million, respectively.
o Programming revenue is recognized in the period during which
programming is provided, pursuant to affiliation agreements.
o Revenue from sales and licensing of software and related service and
maintenance is recognized pursuant to Statement of Position No. 97-2
"SOFTWARE REVENUE RECOGNITION." For multiple element contracts with
vendor specific objective evidence, the Company recognizes revenue for
each specific element when the earnings process is complete. If vendor
specific objective evidence does not exist, revenue is deferred and
recognized on a straight-line basis over the term of the maintenance
period.
o Distribution revenue is recognized in the period that services are
rendered.
COST OF SALES--ELECTRONIC RETAILING
Cost of sales primarily includes actual product cost, provision for
obsolete inventory, buying allowances received from suppliers, shipping and
handling costs and warehouse costs.
ADVERTISING COSTS
Advertising costs generally are expensed as incurred. Advertising expense
aggregated $49 million, $19 million and $37 million for the years ended
December 31, 2004, 2003 and 2002, respectively. Co-operative marketing
costs are recognized as advertising expense to the extent an identifiable
benefit is received and fair value of the benefit can be reasonably
measured. Otherwise, such costs are recorded as a reduction of revenue.
STOCK BASED COMPENSATION
As more fully described in note 13, the Company has granted to its
employees options, stock appreciation rights ("SARs") and options with
tandem SARs to purchase shares of Liberty Series A and Series B common
stock. The Company accounts for these grants pursuant to the recognition
and measurement provisions of Accounting Principles Board Opinion No. 25,
"ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES" ("APB Opinion No. 25"). Under
these provisions, options are accounted for as fixed plan awards and no
compensation expense is recognized because the exercise price is equal to
the market price of the underlying common stock on the date of grant;
whereas options with tandem SARs are accounted for as variable plan awards
unless there is a significant disincentive for employees to exercise the
SAR feature. Compensation for variable plan awards is recognized based upon
the percentage of the options that are vested and the difference between
the market price of the underlying common stock and the exercise price of
the options at the balance sheet date. The following table illustrates the
effect on net income and earnings per share if the Company had applied the
fair value recognition provisions of Statement of Financial Accounting
Standards No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION," ("Statement
123") to its options. Compensation expense for SARs and options with tandem
SARs
14
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
is the same under APB Opinion No. 25 and Statement 123. Accordingly, no pro
forma adjustment for such awards is included in the following table.
YEARS ENDED DECEMBER 31,
------------------------------------------
2004 2003 2002
------- ------- --------
amounts in millions,
except per share amounts
Earnings (loss) from continuing operations $ 100 (1,229) (2,973)
Add stock compensation as determined under the
intrinsic value method, net of taxes 2 2 --
Deduct stock compensation as determined under the
fair value method, net of taxes (44) (49) (78)
------- ------- --------
Pro forma earnings (loss) from continuing operations $ 58 (1,276) (3,051)
======= ======= ========
Basic and diluted earnings (loss) from continuing operations per share:
As reported $ .04 (.44) (1.15)
Pro forma $ .02 (.46) (1.18)
Agreements that require Liberty to reacquire interests in subsidiaries held
by officers and employees in the future are marked-to-market at the end of
each reporting period with corresponding adjustments being recorded to
stock compensation expense.
EARNINGS (LOSS) PER COMMON SHARE
Basic earnings (loss) per common share ("EPS") is computed by dividing net
earnings (loss) by the weighted average number of common shares outstanding
for the period. Diluted EPS presents the dilutive effect on a per share
basis of potential common shares as if they had been converted at the
beginning of the periods presented. The basic EPS calculation is based on
2,856 million weighted average shares outstanding for the year ended
December 31, 2004. The diluted EPS calculation for 2004 includes 14 million
potential common shares. However, due to the relative insignificance of
these dilutive securities, their inclusion does not impact the EPS amount
as reported in the accompanying consolidated statement of operations.
Excluded from diluted earnings per share for the years ended December 31,
2004, 2003 and 2002, are 72 million, 84 million and 78 million potential
common shares because their inclusion would be anti-dilutive.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified for comparability with
the 2004 presentation.
ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America ("GAAP")
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates. Liberty
considers (i) the estimate of the fair value of its long-lived assets
(including goodwill) and any resulting impairment charges, (ii) its
accounting for income taxes, (iii) the fair value of its derivative
instruments and (iv) its assessment of nontemporary declines in value of
its investments to be its most significant estimates.
Liberty holds a significant number of investments that are accounted for
using the equity method. Liberty does not control the decision making
process or business management practices of these affiliates. Accordingly,
Liberty relies on management of these affiliates to provide it with
accurate financial information prepared in accordance with GAAP that
Liberty uses in the application of the equity method. In addition, Liberty
relies on audit reports that are provided by
15
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
the affiliates' independent auditors on the financial statements of such
affiliates. The Company is not aware, however, of any errors in or possible
misstatements of the financial information provided by its equity
affiliates that would have a material effect on Liberty's consolidated
financial statements.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 (revised 2004), "SHARE-BASED
PAYMENTS" ("Statement 123R"). Statement 123R, which is a revision of
Statement 123 and supersedes APB Opinion No. 25, establishes standards for
the accounting for transactions in which an entity exchanges its equity
instruments for goods or services, primarily focusing on transactions in
which an entity obtains employee services. Statement 123R generally
requires companies to measure the cost of employee services received in
exchange for an award of equity instruments (such as stock options and
restricted stock) based on the grant-date fair value of the award, and to
recognize that cost over the period during which the employee is required
to provide service (usually the vesting period of the award). Statement
123R also requires companies to measure the cost of employee services
received in exchange for an award of liability instruments (such as stock
appreciation rights) based on the current fair value of the award, and to
remeasure the fair value of the award at each reporting date.
Public companies, such as Liberty, are required to adopt Statement 123R as
of the beginning of the first interim period that begins after June 15,
2005. The provisions of Statement 123R will affect the accounting for all
awards granted, modified, repurchased or cancelled after July 1, 2005. The
accounting for awards granted, but not vested, prior to July 1, 2005 will
also be impacted. The provisions of Statement 123R allow companies to adopt
the standard on a prospective basis or to restate all periods for which
Statement 123 was effective. Liberty expects to adopt Statement 123R on a
prospective basis, and will include in its financial statements for periods
that begin after June 15, 2005 pro forma information as though the standard
had been adopted for all periods presented.
While Liberty has not yet quantified the impact of adopting Statement 123R,
it believes that such adoption could have a significant impact on its
operating income and net earnings in the future.
(3) SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
--------------------------------------
2004 2003 2002
------ ------ ------
amounts in millions
Cash paid for acquisitions:
Fair value of assets acquired $ 85 9,996 424
Net liabilities assumed (2) (968) (57)
Long-term debt issued -- (4,000) --
Deferred tax liability -- (1,612) (14)
Minority interest 10 (49) (114)
Common stock issued -- (2,656) (195)
------ ------ ------
Cash paid for acquisitions, net of cash acquired $ 93 711 44
====== ====== ======
Cash paid for interest $ 515 400 362
====== ====== ======
Cash paid for income taxes $ 50 56 --
====== ====== ======
Cash provided to discontinued operations is comprised of the following
activities:
YEARS ENDED DECEMBER 31,
--------------------------------------
2004 2003 2002
------ ------ ------
amounts in millions
Cash provided by operating activities $ 216 101 75
Cash used by investing activities (247) (536) (1,260)
Cash provided (used) by financing activities 996 (430) (81)
Change in available cash held by discontinued operations (1,829) (10) 16
------- ------ ------
Net cash provided to discontinued operations $ (864) (875) (1,250)
======= ====== ======
(4) ACQUISITION OF CONTROLLING INTEREST IN QVC, INC.
On September 17, 2003, Liberty completed its acquisition of Comcast
Corporation's ("Comcast") approximate 56.5% ownership interest in QVC for
an aggregate purchase price of approximately $7.9 billion. QVC markets and
sells a wide variety of consumer products in the U.S. and several foreign
countries primarily by means of televised shopping programs on the QVC
networks and via the Internet through its domestic and international
websites. Prior to the closing, Liberty
16
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
owned approximately 41.7% of QVC. Subsequent to the closing, Liberty owned
approximately 98% of QVC's outstanding shares, and the remaining shares of
QVC are held by members of the QVC management team.
Liberty's purchase price for QVC was comprised of 217.7 million shares of
Liberty's Series A common stock valued, for accounting purposes, at $2,555
million, Floating Rate Senior Notes due 2006 in an aggregate principal
amount of $4,000 million (the "Floating Rate Notes") and approximately
$1,358 million in cash (including acquisition costs). The foregoing value
of the Series A common stock issued was based on the average closing price
for such stock for the five days surrounding July 3, 2003, which was the
date that Liberty announced that it had reached an agreement with Comcast
to acquire Comcast's interest in QVC. Substantially all of the cash
component of the purchase price was funded with the proceeds from the
Company's issuance of its 3.50% Senior Notes due 2006 in the aggregate
principal amount of $1.35 billion.
Subsequent to the closing, QVC is a consolidated subsidiary of Liberty. For
financial reporting purposes, the acquisition is deemed to have occurred on
September 1, 2003, and since that date QVC's results of operations have
been consolidated with Liberty's. Prior to its acquisition of Comcast's
interest, Liberty accounted for its investment in QVC using the equity
method of accounting. Liberty has recorded the acquisition of QVC as a step
acquisition, and accordingly, QVC's assets and liabilities have been
recorded at amounts equal to (1) 56.5% of estimated fair value at the date
of acquisition plus (2) 43.5% of historical cost. The $2,048 million excess
of the purchase price over the estimated fair value of 56.5% of QVC's
assets and liabilities combined with Liberty's historical equity method
goodwill of $1,848 million has been recorded as goodwill in the
accompanying consolidated balance sheet. The excess of the purchase price
for Comcast's interest in QVC over the estimated fair value of QVC's assets
and liabilities is attributable to the following: (i) QVC's position as a
market leader in its industry, (ii) QVC's ability to generate significant
cash from operations and Liberty's ability to obtain access to such cash,
and (iii) QVC's perceived significant international growth opportunities.
Liberty's total investment in QVC of $10,717 million is comprised of $2,804
million attributable to its historical equity method investment and $7,913
million representing the purchase price for Comcast's interest. This total
investment has been allocated based on a third party appraisal to QVC's
assets and liabilities as follows (amounts in millions):
Current assets, including cash and cash equivalents of $632 million $ 1,764
Property and equipment 631
Intangible assets subject to amortization:
Customer relationships(1) 2,336
Cable and satellite television distribution rights(1) 2,022
Intangible assets not subject to amortization:
Trademarks 2,385
Goodwill 3,896
Other assets 269
Liabilities (888)
Minority interest (101)
Deferred income taxes (1,597)
--------
$ 10,717
========
-----------------
(1) Customer relationships are being amortized over 10-14 years.
Cable and satellite television distribution rights are being
amortized primarily over 14 years.
The following unaudited pro forma information for Liberty and its
consolidated subsidiaries for the year ended December 31, 2003 was prepared
assuming the acquisition of QVC occurred on January 1, 2003. These pro
forma amounts are not necessarily indicative of operating results
17
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
that would have occurred if the QVC acquisition had occurred on January 1,
2003 (amounts in millions, except per share amounts)
Revenue $ 6,145
Loss from continuing operations $ (1,182)
Net loss $ (1,175)
Loss per common share $ (.41)
(5) DISCONTINUED OPERATIONS
SPIN OFF OF LIBERTY MEDIA INTERNATIONAL, INC.
On June 7, 2004 (the "Spin Off Date"), Liberty completed the spin off (the
"LMI Spin Off") of its wholly-owned subsidiary, Liberty Media
International, Inc. ("LMI"), to its shareholders. Substantially all of the
assets and businesses of LMI were attributed to Liberty's International
Group segment. In connection with the LMI Spin Off, holders of Liberty
common stock on June 1, 2004 (the "LMI Record Date") received 0.05 of a
share of LMI Series A common stock for each share of Liberty Series A
common stock owned at 5:00 pm, New York City time, on the LMI Record Date
and 0.05 of a share of LMI Series B common stock for each share of Liberty
Series B common stock owned at 5:00 pm, New York City time, on the LMI
Record Date. The LMI Spin Off is intended to qualify as a tax-free spin
off. For accounting purposes, the LMI Spin Off is deemed to have occurred
on June 1, 2004, and no gain or loss was recognized by Liberty in
connection with the LMI Spin Off.
In addition to the assets in Liberty's International Group operating
segment, Liberty also contributed certain monetary assets to LMI in
connection with the LMI Spin Off. These monetary assets consisted of $50
million in cash, 5 million American Depository Shares for preferred,
limited voting ordinary shares of News Corporation ("News Corp.") and
related derivatives, and a 99.9% economic interest in 345,000 shares of
preferred stock of ABC Family Worldwide, Inc.
Summarized combined financial information for LMI is as follows:
COMBINED BALANCE SHEETS
MAY 31, DECEMBER 31,
2004(1) 2003
------- ------------
amounts in millions
Cash $ 1,819 13
Current assets 542 18
Equity investments 1,914 1,741
Cost investments 1,201 450
Property and equipment, net 3,221 98
Goodwill and franchise costs 2,628 689
Deferred tax assets -- 458
Other assets 468 84
------- -------
Total assets $11,793 3,551
======= =======
Current liabilities $ 1,170 83
Note payable to Liberty 117 --
Long term debt 4,211 42
Deferred income tax liabilities 511 --
Other liabilities 267 8
Minority interests 1,061 --
Equity 4,456 3,418
------- -------
Total liabilities and equity $11,793 3,551
======= =======
18
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
COMBINED STATEMENTS OF OPERATIONS
FIVE MONTHS YEARS ENDED
ENDED DECEMBER 31,
MAY 31, ---------------------
2004(1) 2003 2002
---------- ------ ------
amounts in millions
Revenue $ 956 109 104
Operating, selling, general and administrative expenses (682) (94) (81)
Depreciation and amortization (368) (16) (13)
Impairment of long-lived assets -- -- (46)
----- ----- -----
Operating loss (94) (1) (36)
Other income (expense) (54) 50 (490)
Income tax benefit (expense) (30) (28) 178
Minority interests 92 -- --
----- ----- -----
Earnings (loss) before cumulative effect of
accounting change (86) 21 (348)
Cumulative effect of accounting change -- -- (238)
----- ----- -----
Net earnings (loss) $ (86) 21 (586)
===== ===== =====
-------------------
(1) LMI's financial position and results of operations for the five months
ended May 31, 2004 include UnitedGlobalCom, Inc., which was
consolidated beginning January 1, 2004.
Following the LMI Spin Off, LMI and Liberty operate independently, and
neither has any stock ownership, beneficial or otherwise, in the other. In
connection with the LMI Spin Off, LMI and Liberty entered into certain
agreements in order to govern certain of the ongoing relationships between
Liberty and LMI after the LMI Spin Off and to provide for an orderly
transition. These agreements include a Reorganization Agreement, a
Facilities and Services Agreement, a Tax Sharing Agreement and a Short-Term
Credit Facility.
The Reorganization Agreement provides for, among other things, the
principal corporate transactions required to effect the LMI Spin Off and
cross indemnities. Pursuant to the Facilities and Services Agreement,
Liberty provides LMI with office space and certain general and
administrative services including legal, tax, accounting, treasury,
engineering and investor relations support. LMI reimburses Liberty for
direct, out-of-pocket expenses incurred by Liberty in providing these
services and for LMI's allocable portion of facilities costs and costs
associated with any shared services or personnel.
Under the Tax Sharing Agreement, Liberty generally is responsible for U.S.
federal, state and local and foreign income taxes owing with respect to
consolidated returns which include both Liberty and LMI. LMI is responsible
for all other taxes with respect to returns which include LMI, but do not
include Liberty whether accruing before, on or after the LMI Spin Off. The
Tax Sharing Agreement requires that LMI will not take, or fail to take, any
action where such action, or failure to act, would be inconsistent with or
prohibit the LMI Spin Off from qualifying as a tax-free transaction.
Moreover, LMI has indemnified Liberty for any loss resulting from such
action or failure to act, if such action or failure to act precludes the
LMI Spin Off from qualifying as a tax-free transaction.
Pursuant to the Short-Term Credit Facility, Liberty agreed to make loans to
LMI from time to time up to an aggregate principal amount of $383 million.
In addition, certain subsidiaries of LMI had notes payable to Liberty in
the aggregate amount of $117 million at the date of the LMI Spin Off.
During the third quarter of 2004, LMI completed a rights offering, and used
a portion of the cash
19
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
proceeds to repay all principal and accrued interest due under the notes
payable and Short-Term Credit Facility. Subsequent to this repayment, the
Short-Term Credit Facility was terminated.
SPIN OFF OF DISCOVERY HOLDING COMPANY ("DHC")
During the first quarter of 2005, the Board of Directors of Liberty
approved a resolution to spin off (the "DHC Spin Off") the capital stock of
DHC to the holders of Liberty Series A and Series B common stock. The DHC
Spin Off was completed on July 21, 2005 (the "DHC Spin Off Date") and was
effected as a dividend by Liberty to holders of its Series A and Series B
common stock of shares of DHC Series A and Series B common stock,
respectively. Holders of Liberty common stock on July 15, 2005 received
0.10 of a share of DHC Series A common stock for each share of Liberty
Series A common stock owned and 0.10 of a share of DHC Series B common
stock for each share of Liberty Series B common stock owned. The DHC Spin
Off did not involve the payment of any consideration by the holders of
Liberty common stock and is intended to qualify as a tax-free transaction.
At the time of the DHC Spin Off, DHC's assets were comprised of Liberty's
100% ownership interest in Ascent Media Group, LLC ("Ascent Media"),
Liberty's 50% ownership interest in Discovery Communications, Inc.
("Discovery") and $200 million in cash. Summarized combined financial
information for DHC (excluding the $200 million cash contribution) is as
follows:
COMBINED BALANCE SHEETS
<Table>
<Caption>
DECEMBER 31,
---------------------
2004 2003
------ ------
amounts in millions
Cash and cash equivalents $ 22 8
Other current assets 178 123
Equity investments 2,950 2,868
Property and equipment, net 259 258
Goodwill 2,135 2,131
Other assets 21 10
------ ------
Total assets $5,565 5,398
====== ======
Current liabilities $ 108 61
Deferred income tax liabilities 1,021 949
Other liabilities 25 22
Equity 4,411 4,366
------ ------
Total liabilities and equity $5,565 5,398
====== ======
COMBINED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
-----------------------------------
2004 2003 2002
----- ----- -----
amounts in millions
Revenue $ 631 508 538
Operating, selling, general and administrative expenses (536) (436) (452)
Depreciation and amortization (78) (71) (68)
Impairment -- -- (84)
----- ----- -----
Operating income (loss) 17 1 (66)
Share of earnings (losses) of affiliates 82 38 (32)
Other, net 1 (23) (22)
Income tax benefit (expense) (39) (12) 31
----- ----- -----
Earnings (loss) before cumulative effect of accounting
change 61 4 (89)
Cumulative effect of accounting change -- -- (20)
----- ----- -----
Net earnings (loss) $ 61 4 (109)
===== ===== =====
20
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
DMX MUSIC
During the fourth quarter of 2004, the executive committee of the board of
directors of Liberty approved a plan to dispose of Liberty's approximate
56% ownership interest in Maxide Acquisition, Inc. (d/b/a DMX Music,
"DMX"). DMX is principally engaged in programming, distributing and
marketing digital and analog music services to homes and businesses and was
included in Liberty's Networks Group operating segment. On February 14,
2005, DMX commenced proceedings under Chapter 11 of the United States
Bankruptcy Code. As a result of marketing efforts conducted prior to the
bankruptcy filing, DMX has entered into an arrangement, subject to the
approval by the Bankruptcy Court, to sell substantially all of its
operating assets to an independent third party. Other prospective buyers
will have an opportunity to submit offers to purchase all or a portion of
those assets by a date to be determined by the Bankruptcy Court. After
competitive bids, if any, have been submitted, Liberty expects that the
Bankruptcy Court will make a determination as to the appropriate buyer, and
the operating assets of DMX will be sold. In connection with its decision
to dispose of its ownership interest, Liberty recognized a $23 million
impairment loss to write down the carrying value of the net assets of DMX
to their estimated fair value based upon the aforementioned arrangement to
sell the assets. Such loss has been included in loss from discontinued
operations in the accompanying consolidated financial statements.
The consolidated financial statements and accompanying notes of Liberty
have been revised to reflect LMI, DHC and DMX as discontinued operations.
Accordingly, the assets and liabilities, revenue, costs and expenses, and
cash flows of LMI, DHC and DMX have been excluded from the respective
captions in the accompanying consolidated balance sheets, statements of
operations, statements of comprehensive earnings (loss) and statements of
cash flows and have been reported separately in such consolidated financial
statements.
(6) INVESTMENTS IN AVAILABLE-FOR-SALE SECURITIES AND OTHER COST INVESTMENTS
Investments in AFS Securities, which are recorded at their respective fair
market values, and other cost investments are summarized as follows:
DECEMBER 31,
--------------------------
2004 2003
-------- --------
amounts in millions
News Corp.(1) $ 9,667 7,633
IAC/InterActiveCorp ("IAC") 3,824 4,697
Time Warner Inc. ("Time Warner")(2) 3,330 3,080
Sprint Corporation ("Sprint") 2,342 1,134
Motorola(3) 1,273 1,068
Viacom, Inc. ("Viacom") 552 674
Other AFS equity securities(4) 471 382
Other AFS debt securities(1)(5) 304 985
Other cost investments and related receivables 87 178
-------- --------
21,850 19,831
Less short-term investments (3) (265)
-------- --------
$ 21,847 19,566
======== ========
-----------
(1) Certain of Liberty's News Corp. ADSs and other AFS debt securities
were contributed to LMI in connection with the Spin Off. See note 5.
(2) Includes $176 million of shares pledged as collateral for share
borrowing arrangements at December 31, 2004.
(3) Includes $654 million and $533 million of shares pledged as collateral
for share borrowing arrangements at December 31, 2004 and 2003,
respectively.
(4) Includes $77 million of shares pledged as collateral for share
borrowing arrangements at December 31, 2004.
21
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(5) At December 31, 2004, other AFS debt securities include $276 million
of investments in third-party marketable debt securities held by
Liberty parent. At December 31, 2003, such investments aggregated $560
million.
NEWS CORP.
Effective October 14, 2003, pursuant to a put/call arrangement with News
Corp., Liberty acquired $500 million of American Depository Shares ("ADSs")
for News Corp. preferred limited voting shares at $21.50 per ADR. In
addition during 2003, Liberty sold certain of its News Corp. non-voting
ADSs in the open market and purchased voting News Corp. ADSs in the open
market. Liberty recognized a pre-tax gain of $236 million on the sale of
its non-voting ADSs. In early 2004, Liberty purchased additional voting
ADSs and sold additional non-voting ADSs in the open market and recorded a
pre-tax gain of $134 million. On a net basis, Liberty effectively exchanged
21.2 million non-voting ADSs and $693 million in cash for 48 million voting
ADSs, taking into account proceeds from sales of, and unwinding of collars
on, non-voting News Corp. ADSs.
In the fourth quarter of 2004, News Corp. reincorporated as a U.S.
corporation and effected a reverse stock split by exchanging one share of
newly issued voting stock ("NWS") or non-voting stock ("NWSA") for every
two outstanding ADRs. In November 2004, Liberty entered into total return
equity swaps with a financial institution with respect to 92 million shares
of NWS. Pursuant to the terms of the swap, the financial institution
acquired the 92 million shares of NWS for Liberty's benefit for a weighted
average strike price of $17.48 (the "Strike Price"). The swaps also
provided for (1) the obligation of the financial institution to pay Liberty
an amount equal to the number of shares times any increase in the per-share
price of NWS above the Strike Price and (2) the obligation of Liberty to
pay the institution any decrease in the per-share price of NWS below the
Strike Price. In December 2004, Liberty elected to terminate the swaps. In
connection with such termination, Liberty delivered 86.9 million shares of
NWSA with a fair market value of $1,608 million in exchange for the 92
million shares of NWS with a fair market value of $1,749 million.
Accordingly, Liberty recognized a pre-tax gain on the swap transaction of
$141 million, which is included in realized and unrealized gains on
financial instruments and a pre-tax gain on the exchange of NWSA for NWS of
$710 million, which is included in gains on dispositions. Subsequent to the
completion of this transaction, Liberty has an approximate 17% economic
interest and an approximate 18% voting interest in News Corp.
VIVENDI UNIVERSAL ("VIVENDI") AND IAC/INTERACTIVECORP
Prior to May 7, 2002, Liberty held various interests in IAC that were
accounted for using the equity method. IAC owned and operated businesses in
cable programming, television production, electronic retailing, ticketing
operations and Internet services.
On May 7, 2002, Liberty, IAC, and Vivendi entered into a series of
transactions which effectively resulted in Liberty exchanging 25 million
shares of IAC, its indirect interests in certain of IAC's cable programming
businesses and its 30% interest in multiThematiques S.A. for 37.4 million
Vivendi ordinary shares, which at the date of the transaction had an
aggregate fair value of $1,013 million. Liberty recognized a loss of $817
million based on the difference between the fair value of the Vivendi
shares received and the carrying value of the assets relinquished,
including enterprise-level goodwill of $514 million which had been
allocated to the reporting unit holding the IAC interests.
During the year ended December 31, 2003 and pursuant to contractual
pre-emptive rights, Liberty acquired an aggregate 48.7 million shares of
IAC for cash consideration of $1,166 million. At December 31, 2004, Liberty
owns approximately 20% of IAC common stock representing an approximate 47%
voting interest. However, due to certain governance arrangements which
limit its ability to exert significant influence over IAC, Liberty has
accounted for this investment as an AFS Security. Liberty's approximate 3%
ownership interest in Vivendi was also accounted for as an AFS Security
following the May 7, 2002 transaction. During the fourth quarter of 2003,
22
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
Liberty sold all of its shares of Vivendi common stock in the open market
for aggregate cash proceeds of $838 million and recognized a $262 million
gain (before tax expense of $102 million).
NONTEMPORARY DECLINES IN FAIR VALUE OF INVESTMENTS
During the years ended December 31, 2004, 2003 and 2002, Liberty determined
that certain of its AFS Securities and cost investments experienced
nontemporary declines in value. The primary factors considered by Liberty
in determining the timing of the recognition for the majority of these
impairments was the length of time the investments traded below Liberty's
cost bases and the lack of near-term prospects for recovery in the stock
prices. As a result, the carrying amounts of such investments were adjusted
to their respective fair values based primarily on quoted market prices at
the balance sheet date. These adjustments are reflected as nontemporary
declines in fair value of investments in the consolidated statements of
operations. Nontemporary declines in value recorded in 2002 related
primarily to Liberty's investments in Time Warner Inc., News Corporation
and Sprint Corporation. Nontemporary declines in value in 2004 and 2003
were not significant.
UNREALIZED HOLDINGS GAINS AND LOSSES
Unrealized holding gains and losses related to investments in AFS
Securities are summarized below.
DECEMBER 31, 2004 DECEMBER 31, 2003
-------------------------- --------------------------
EQUITY DEBT EQUITY DEBT
SECURITIES SECURITIES SECURITIES SECURITIES
---------- ---------- ---------- -----------
amounts in millions
Gross unrealized holding gains $7,292 19 5,779 1
Gross unrealized holding losses $ (15) -- -- --
Management estimates that the fair market value of all of its other cost
investments approximated $151 million and $405 million at December 31, 2004
and 2003, respectively. Management calculates market values of its other
cost investments using a variety of approaches including multiple of cash
flow, discounted cash flow model, per subscriber value, or a value of
comparable public or private businesses. No independent appraisals were
conducted for those cost investment assets.
(7) DERIVATIVE INSTRUMENTS
The Company's derivative instruments are summarized as follows:
DECEMBER 31,
------------------------
TYPE OF DERIVATIVE 2004 2003
------------------ ------- -------
amounts in millions
ASSETS
Equity collars $ 2,016 3,358
Put spread collars 291 331
Other 121 101
------- -------
Total 2,428 3,790
Less current portion (827) (543)
------- -------
$ 1,601 3,247
======= =======
LIABILITIES
Exchangeable debenture call option obligations $ 1,102 990
Put options 445 772
Equity collars 398 293
Borrowed shares 907 533
Other 139 22
------- -------
Total 2,991 2,610
Less current portion (1,179) (854)
------- -------
$ 1,812 1,756
======= =======
23
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
EQUITY COLLARS, NARROW-BAND COLLARS, PUT SPREAD COLLARS AND PUT OPTIONS
The Company has entered into equity collars, narrow-band collars, put
spread collars, written put and call options and other financial
instruments to manage market risk associated with its investments in
certain marketable securities. These instruments are recorded at fair value
based on option pricing models. Equity collars provide the Company with a
put option that gives the Company the right to require the counterparty to
purchase a specified number of shares of the underlying security at a
specified price (the "Company Put Price") at a specified date in the
future. Equity collars also provide the counterparty with a call option
that gives the counterparty the right to purchase the same securities at a
specified price at a specified date in the future. The put option and the
call option generally have equal fair values at the time of origination
resulting in no cash receipts or payments. Narrow-band collars are equity
collars in which the put and call prices are set so that the call option
has a relatively higher fair value than the put option at the time of
origination. In these cases the Company receives cash equal to the
difference between such fair values.
Put spread collars provide the Company and the counterparty with put and
call options similar to equity collars. In addition, put spread collars
provide the counterparty with a put option that gives it the right to
require the Company to purchase the underlying securities at a price that
is lower than the Company Put Price. The inclusion of the secondary put
option allows the Company to secure a higher call option price while
maintaining net zero cost to enter into the collar. However, the inclusion
of the secondary put exposes the Company to market risk if the underlying
security trades below the put spread price.
BORROWED SHARES
In connection with certain of its derivative instruments, Liberty
periodically borrows shares of the underlying securities from a
counterparty and delivers these borrowed shares in settlement of maturing
derivative positions. In these transactions, a similar number of shares
that are owned by Liberty have been posted as collateral with the
counterparty. These share borrowing arrangements can be terminated at any
time at Liberty's option by delivering shares to the counterparty. The
counterparty can terminate these arrangements upon the occurrence of
certain events which limit the trading volume of the underlying security.
The liability under these share borrowing arrangements is marked to market
each reporting period with changes in value recorded in unrealized gains or
losses in the statement of operations. The shares posted as collateral
under these arrangements continue to be treated as AFS securities and are
marked to market each reporting period with changes in value recorded as
unrealized gains or losses in other comprehensive earnings.
EXCHANGEABLE DEBENTURE CALL OPTION OBLIGATIONS
Liberty has issued senior exchangeable debentures which are exchangeable
for the value of a specified number of shares of Sprint common stock,
Motorola common stock, Viacom Class B common stock or Time Warner common
stock, as applicable. (See note 9 for a more complete description of the
exchangeable debentures.)
Under Statement 133, the call option feature of the exchangeable debentures
is reported separately from the long-term debt portion in the consolidated
balance sheets at fair value. Changes in the fair value of the call option
obligations are recognized as unrealized gains (losses) on derivative
instruments in Liberty's consolidated statements of operations.
24
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
REALIZED AND UNREALIZED GAINS ON DERIVATIVE INSTRUMENTS
Realized and unrealized gains (losses) on derivative instruments during the
years ended December 31, 2004, 2003 and 2002 are comprised of the
following:
YEARS ENDED DECEMBER 31,
-----------------------------------------
2004 2003 2002
------- ------- -------
amounts in millions
Change in fair value of exchangeable debenture call
option feature $ (129) (158) 784
Change in the fair value of equity collars (941) (483) 4,032
Change in the fair value of borrowed shares (227) (121) --
Change in the fair value of put options 2 108 (445)
Change in the fair value of put spread collars 8 21 71
Change in fair value of hedged AFS Securities -- -- (2,378)
Change in fair value of other derivatives(1) 3 (28) 63
------- ------- -------
Total realized and unrealized gains (losses), net $(1,284) (661) 2,127
======= ======= =======
-------------
(1) Comprised primarily of forward foreign exchange contracts and interest
rate swap agreements.
(8) INVESTMENTS IN AFFILIATES ACCOUNTED FOR USING THE EQUITY METHOD
Liberty has various investments accounted for using the equity method. The
following table includes Liberty's carrying amount and percentage ownership
of the more significant investments in affiliates at December 31, 2004 and
the carrying amount at December 31, 2003:
DECEMBER 31, DECEMBER 31,
2004 2003
------------------------- ------------
PERCENTAGE CARRYING CARRYING
OWNERSHIP AMOUNT AMOUNT
---------- -------- ---------
dollar amounts in millions
Court TV 50% $277 260
GSN 50% 251 240
Other various 256 245
---- ----
$784 745
==== ====
The following table reflects Liberty's share of earnings (losses) of
affiliates including nontemporary declines in value:
YEARS ENDED DECEMBER 31,
--------------------------------------
2004 2003 2002
---- ---- ----
amounts in millions
Court TV $ 17 (1) (2)
GSN (1) -- (6)
QVC* -- 107 154
Other (1) (99) (203)
---- ---- ----
$ 15 7 (57)
==== ==== ====
------------
* A consolidated subsidiary since September 2003.
In April 2002, Liberty sold its 40% interest in Telemundo Communications
Group for cash proceeds of $679 million, and recognized a gain of $344
million (before related tax expense of $134 million) based upon the
difference between the cash proceeds and Liberty's basis in Telemundo,
including allocated goodwill of $25 million.
25
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
During the years ended December 31, 2003 and 2002, Liberty recorded
nontemporary declines in fair value aggregating $71 million and $76
million, respectively, related to certain of its other equity method
investments. Such amounts are included in share of losses of affiliates.
(9) LONG-TERM DEBT
Debt is summarized as follows:
OUTSTANDING CARRYING VALUE
PRINCIPAL DECEMBER 31,
DECEMBER 31, ---------------------------
2004 2004 2003
----------- ------ -----
amounts in millions
Parent company debt:
Senior notes and debentures
3.5% Senior Notes due 2006 $ 514 513 1,185
Floating Rate Senior Notes due 2006 2,463 2,463 2,463
7.875% Senior Notes due 2009 716 711 744
7.75% Senior Notes due 2009 234 235 239
5.7% Senior Notes due 2013 802 800 997
8.5% Senior Debentures due 2029 500 495 495
8.25% Senior Debentures due 2030 959 951 992
Senior exchangeable debentures
4% Senior Exchangeable Debentures due 2029 869 249 246
3.75% Senior Exchangeable Debentures due 2030 810 228 226
3.5% Senior Exchangeable Debentures due 2031 600 231 229
3.25% Senior Exchangeable Debentures due 2031 559 118 127
0.75% Senior Exchangeable Debentures due 2023 1,750 1,473 1,398
-------- ------ -----
10,776 8,467 9,341
Subsidiary debt 109 109 91
-------- ------ -----
Total debt $ 10,885 8,576 9,432
========
Less current maturities (10) (15)
------ -----
Total long-term debt $8,566 9,417
====== =====
SENIOR NOTES AND DEBENTURES
The Floating Rate Notes accrue interest at 3 month LIBOR plus a margin. At
December 31, 2004 the borrowing rate was 3.99%.
Interest on the Senior Notes and Senior Debentures is payable semi-annually
based on the date of issuance.
The Senior Notes and Senior Debentures are stated net of an aggregate
unamortized discount of $20 million and $24 million at December 31, 2004
and 2003, respectively, which is being amortized to interest expense in the
accompanying consolidated statements of operations.
SENIOR EXCHANGEABLE DEBENTURES
In November 1999, Liberty issued $869 million of 4% Senior Exchangeable
Debentures due 2029. Each $1,000 debenture is exchangeable at the holder's
option for the value of 11.4743 shares of Sprint common stock. Liberty may,
at its election, pay the exchange value in cash, Sprint common stock or a
combination thereof. Liberty, at its option, may redeem the debentures, in
whole or in part, for cash generally equal to the face amount of the
debentures plus accrued interest.
In February and March 2000, Liberty issued an aggregate of $810 million of
3.75% Senior Exchangeable Debentures due 2030. Each $1,000 debenture is
exchangeable at the holder's
26
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
option for the value of 8.3882 shares of Sprint common stock. Liberty may,
at its election, pay the exchange value in cash, Sprint common stock or a
combination thereof. Liberty, at its option, may redeem the debentures, in
whole or in part, for cash equal to the face amount of the debentures plus
accrued interest.
In January 2001, Liberty issued $600 million of 3.5% Senior Exchangeable
Debentures due 2031. Each $1,000 debenture is exchangeable at the holder's
option for the value of 36.8189 shares of Motorola common stock and 4.0654
shares of Freescale Semiconductor, Inc. ("Freescale"), which Motorola spun
off to its shareholders in December 2004. Such exchange value is payable,
at Liberty's option, in cash, Motorola and Freescale stock or a combination
thereof. On or after January 15, 2006, Liberty, at its option, may redeem
the debentures, in whole or in part, for cash generally equal to the face
amount of the debentures plus accrued interest.
In March 2001, Liberty issued $817.7 million of 3.25% Senior Exchangeable
Debentures due 2031. Each $1,000 debenture is exchangeable at the holder's
option for the value of 18.5666 shares of Viacom Class B common stock. Such
exchange value is payable at Liberty's option in cash, Viacom stock or a
combination thereof. On or after March 15, 2006, Liberty, at its option,
may redeem the debentures, in whole or in part, for cash equal to the face
amount of the debentures plus accrued interest.
In March and April 2003, Liberty issued an aggregate principal amount of
$1,750 million of 0.75% Senior Exchangeable Debentures due 2023. Each
$1,000 debenture is exchangeable at the holder's option for the value of
57.4079 shares of Time Warner common stock. Liberty may, at its election,
pay the exchange value in cash, Time Warner common stock, shares of Liberty
Series A common stock or a combination thereof. On or after April 5, 2008,
Liberty, at its option, may redeem the debentures, in whole or in part, for
shares of Time Warner common stock, cash or any combination thereof equal
to the face amount of the debentures plus accrued interest. On March 30,
2008, March 30, 2013 or March 30, 2018, each holder may cause Liberty to
purchase its exchangeable debentures, and Liberty, at its election, may pay
the purchase price in shares of Time Warner common stock, cash, Liberty
Series A common stock, or any combination thereof.
Interest on the Company's exchangeable debentures is payable semi-annually
based on the date of issuance. At maturity, all of the Company's
exchangeable debentures are payable in cash.
In accordance with Statement 133, the call option feature of the
exchangeable debentures is reported at fair value and separately from the
long-term debt in the consolidated balance sheet. The reported amount of
the long-term debt portion of the exchangeable debentures is calculated as
the difference between the face amount of the debentures and the fair value
of the call option feature on the date of issuance. The long-term debt is
accreted to its face amount over the expected term of the debenture using
the effective interest method. Accordingly, at December 31, 2004, the
difference between the principal amount and the carrying value of the
long-term debt portion is the unamortized fair value of the call option
feature that was recorded at the date of issuance of the respective
debentures. Accretion related to all of the Company's exchangeable
debentures aggregated $83 million, $61 million and $7 million during the
years ended December 31, 2004, 2003 and 2002, respectively, and is included
in interest expense in the accompanying consolidated statements of
operations.
SUBSIDIARY DEBT
Subsidiary debt at December 31, 2004 is comprised of capitalized satellite
transponder lease obligations.
In December 2004, Starz Entertainment cancelled its bank credit facility.
27
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
FIVE YEAR MATURITIES
The U.S. dollar equivalent of the annual maturities of Liberty's debt for
each of the next five years is as follows (amounts in millions):
2005 $ 10
2006 $ 2,988
2007 $ 12
2008 $ 1,762
2009 $ 962
FAIR VALUE OF DEBT
Liberty estimates the fair value of its debt based on the quoted market
prices for the same or similar issues or on the current rate offered to
Liberty for debt of the same remaining maturities. The fair value of
Liberty's publicly traded debt at December 31, 2004 is as follows (amounts
in millions):
Fixed rate senior notes $ 2,373
Floating rate senior notes $ 2,492
Senior debentures $ 1,628
Senior exchangeable debentures, including call option
obligation $ 4,376
Liberty believes that the carrying amount of its subsidiary debt
approximated fair value at December 31, 2004.
(10) INCOME TAXES
Income tax benefit (expense) consists of:
YEARS ENDED DECEMBER 31,
--------------------------------------------
2004 2003 2002
------ ------ ------
amounts in millions
Current:
Federal $ (177) (4) (5)
State and local (61) (29) (1)
Foreign (114) (40) (2)
------ ------ ------
(352) (73) (8)
------ ------ ------
Deferred:
Federal 166 (224) 1,262
State and local 59 (44) 227
Foreign 8 (1) --
------ ------ ------
233 (269) 1,489
------ ------ ------
Income tax benefit (expense) $ (119) (342) 1,481
====== ====== ======
28
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
Income tax benefit (expense) differs from the amounts computed by applying
the U.S. federal income tax rate of 35% as a result of the following:
YEARS ENDED DECEMBER 31,
--------------------------------------------
2004 2003 2002
------ ------ ------
amounts in millions
Computed expected tax benefit (expense) $ (77) 310 1,559
Impairment charges and amortization of
goodwill not deductible for income
tax purposes -- (477) (32)
State and local income taxes, net of
federal income taxes (6) (45) 151
Foreign taxes (47) (40) (6)
Recognition of tax basis in equity of DMX 38 -- --
Change in valuation allowance affecting
tax expense (12) (65) (13)
Adjustments to dividend received deduction -- (21) --
Disposition of nondeductible goodwill in
sales transactions -- -- (189)
Other, net (15) (4) 11
------ ------ ------
Income tax benefit (expense) $ (119) (342) 1,481
====== ====== ======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are
presented below:
DECEMBER 31,
-----------------------------
2004 2003
-------- --------
amounts in millions
Deferred tax assets:
Net operating and capital loss carryforwards $ 1,116 727
Accrued stock compensation 125 93
Other future deductible amounts 189 124
-------- --------
Deferred tax assets 1,430 944
Valuation allowance (400) (378)
-------- --------
Net deferred tax assets 1,030 566
-------- --------
Deferred tax liabilities:
Investments 7,297 6,680
Intangible assets 2,465 2,618
Discount on exchangeable debentures 863 849
Other 240 170
-------- --------
Deferred tax liabilities 10,865 10,317
-------- --------
Net deferred tax liabilities $ 9,835 9,751
======== ========
The Company's valuation allowance increased $22 million in 2004, including
a $12 million charge to tax expense and a $10 million valuation allowance
recorded in connection with acquisitions.
At December 31, 2004, Liberty had net operating and capital loss
carryforwards for income tax purposes aggregating approximately $3,033
million which, if not utilized to reduce taxable income in future periods,
will expire as follows: 2006: $3 million; 2007: $87 million; 2008: $13
29
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
million; 2009: $1,011 million; and beyond 2009: $1,919 million. Of the
foregoing net operating and capital loss carryforward amount, approximately
$1,149 million is subject to certain limitations and may not be currently
utilized. The remaining $1,884 million is currently available to be
utilized to offset future taxable income of Liberty's consolidated tax
group.
During the period from March 9, 1999 to August 10, 2001, Liberty was
included in the consolidated federal income tax return of AT&T and was a
party to a tax sharing agreement with AT&T (the "AT&T Tax Sharing
Agreement"). Under the AT&T Tax Sharing Agreement, Liberty received a cash
payment from AT&T in periods when Liberty generated taxable losses and such
taxable losses were utilized by AT&T to reduce the consolidated income tax
liability. This utilization of taxable losses was accounted for by Liberty
as a current federal intercompany income tax benefit. To the extent such
losses were not utilized by AT&T, such amounts were available to reduce
federal taxable income generated by Liberty in future periods, similar to a
net operating loss carryforward, and were accounted for as a deferred
federal income tax benefit. During the period from March 10, 1999 to
December 31, 2002, Liberty received cash payments from AT&T aggregating
$555 million as payment for Liberty's taxable losses that AT&T utilized to
reduce its income tax liability. In the fourth quarter of 2004, AT&T
requested a refund from Liberty of $70 million, plus accrued interest,
relating to losses that it generated in 2002 and 2003 and were able to
carry back to offset taxable income previously offset by Liberty's losses.
In the event AT&T generates capital losses in 2004 and is able to carry
back such losses to offset taxable income previously offset by Liberty's
losses, Liberty may be required to refund as much as an additional $229
million (excluding accrued interest) to AT&T. Liberty is currently unable
to estimate how much, if any, it will ultimately refund to AT&T, but does
not believe that any such refund, if made, would be material to its
financial position.
(11) STOCKHOLDERS' EQUITY
PREFERRED STOCK
Liberty's preferred stock is issuable, from time to time, with such
designations, preferences and relative participating, optional or other
rights, qualifications, limitations or restrictions thereof, as shall be
stated and expressed in a resolution or resolutions providing for the issue
of such preferred stock adopted by Liberty's Board of Directors. As of
December 31, 2004, no shares of preferred stock were issued.
COMMON STOCK
The Series A common stock has one vote per share, and the Series B common
stock has ten votes per share. Each share of the Series B common stock is
exchangeable at the option of the holder for one share of Series A common
stock.
As of December 31, 2004, there were 56 million shares of Liberty Series A
common stock and 28 million shares of Liberty Series B common stock
reserved for issuance under exercise privileges of outstanding stock
options and warrants.
PURCHASES OF COMMON STOCK
During the year ended December 31, 2004, the Company acquired approximately
96.0 million shares of its Series B common stock from the estate and family
of the late founder of Liberty's former parent in exchange for
approximately 105.4 million shares of Liberty Series A common stock. Ten
million of the acquired Series B shares have been accounted for as treasury
stock in the accompanying consolidated balance sheet, and the remaining
Series B shares have been retired.
On July 28, 2004, Liberty completed a transaction with Comcast pursuant to
which Liberty repurchased 120.3 million shares of its Series A common stock
(valued at $1,017 million) held by Comcast in exchange for 100% of the
stock of Encore ICCP, Inc. ("Encore ICCP"), a wholly owned subsidiary of
Liberty. At the time of the exchange, Encore ICCP held Liberty's 10%
ownership interest in E! Entertainment Television, Liberty's 100% ownership
interest in International Channel Networks, all of Liberty's rights,
benefits and obligations under a TCI Music contribution
30
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
agreement, and $547 million in cash. The transaction also resolved all
litigation pending between Comcast and Liberty regarding the TCI Music
contribution agreement, to which Comcast succeeded as part of its
acquisition of AT&T Broadband in November of 2002. In connection with this
transaction, Liberty recognized a pre-tax gain on disposition of assets of
$387 million.
During 2004, Liberty entered into zero-strike call spreads ("Z-Call") with
respect to six million shares of its Series A common stock. The Z-Call is
comprised of a call option purchased by Liberty from the counterparty with
a zero strike price and a similar call option purchased by the counterparty
from Liberty with a strike price equal to the market price of the Series A
common stock on the date of execution. Upon expiration of the Z-Call,
Liberty can purchase the subject shares of Series A common stock from the
counterparty for no additional cost, and the counterparty can purchase the
same shares from Liberty at the current market price, or the parties can
net cash settle. Liberty accounts for the Z-Calls pursuant to Statement of
Financial Accounting Standards No. 150, "ACCOUNTING FOR CERTAIN FINANCIAL
INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY"
("Statement 150"). The total net payment by Liberty for the Z-Calls
outstanding at December 31, 2004 was $63 million and is included in short
term derivative assets in the accompanying consolidated balance sheet.
Changes in the fair value of the Z-Calls are included in realized and
unrealized gains (losses) on financial instruments in the accompanying
consolidated statement of operations.
During 2004, Liberty also sold put options with respect to shares of its
Series A common stock for cash proceeds of $3 million. All of these put
options expired unexercised prior to December 31, 2004. Liberty accounted
for these put options pursuant to Statement 150. Accordingly, the put
options were recorded at fair value, and changes in the fair value of the
put options are included in realized and unrealized gains (losses) on
financial instruments in the accompanying consolidated statement of
operations.
During the years ended December 31, 2003 and 2002, the Company purchased
42.3 million and 25.7 million shares of its common stock for aggregate cash
consideration of $437 million and $281 million, respectively. These
purchases have been accounted for as retirements of common stock and have
been reflected as a reduction of stockholders' equity in the accompanying
consolidated balance sheet.
During 2002, Liberty sold put options on 7.0 million shares of its Series A
common stock, 4.0 million of which were outstanding at December 31, 2002.
Liberty sold another 9.3 million put options in the first quarter of 2003.
All of these options expired unexercised prior to December 31, 2003. The
Company accounted for these put options pursuant to EITF 00-19, "ACCOUNTING
FOR DERIVATIVE FINANCIAL INSTRUMENTS INDEXED TO, AND POTENTIALLY SETTLED
IN, A COMPANY'S OWN STOCK" and recorded a net increase to additional
paid-in-capital of $37 million during the year ended December 31, 2003.
(12) TRANSACTIONS WITH OFFICERS AND DIRECTORS
CHAIRMAN'S EMPLOYMENT AGREEMENT
In connection with the AT&T Merger, an employment agreement between the
Company's Chairman and TCI was assigned to the Company.
The Chairman's employment agreement provides for, among other things,
deferral of a portion (not in excess of 40%) of the monthly compensation
payable to him for all employment years commencing on or after January 1,
1993. The deferred amounts will be payable in monthly installments over a
20-year period commencing on the termination of the Chairman's employment,
together with interest thereon at the rate of 8% per annum compounded
annually from the date of deferral to the date of payment. The aggregate
liability under this arrangement at December 31, 2004 is $1.8 million, and
is included in other liabilities in the accompanying consolidated balance
sheet.
31
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
The Chairman's employment agreement also provides that in the event of
termination of his employment with Liberty, he will be entitled to receive
240 consecutive monthly payments equal to $15,000 increased at the rate of
12% per annum compounded annually from January 1, 1988 to the date payment
commences ($91,956 per month as of December 31, 2004). Such payments would
commence on the first day of the month succeeding the termination of
employment. In the event of the Chairman's death, his beneficiaries would
be entitled to receive the foregoing monthly payments. The aggregate
liability under this arrangement at December 31, 2004 is $22.1 million, and
is included in other liabilities in the accompanying consolidated balance
sheet.
The Company's Chairman deferred a portion of his monthly compensation under
his previous employment agreement with TCI. The Company assumed the
obligation to pay that deferred compensation in connection with the AT&T
Merger. The deferred obligation (together with interest at the rate of 13%
per annum compounded annually), which aggregated $12.3 million at December
31, 2004 and is included in other liabilities in the accompanying
consolidated balance sheets, is payable on a monthly basis, following the
occurrence of specified events, under the terms of the previous employment
agreement. The rate at which interest accrues on the deferred obligation
was established in 1983 pursuant to the previous employment agreement.
OTHER
Effective November 28, 2003, Liberty acquired all the outstanding stock of
TP Investment, Inc. ("TPI"), a corporation wholly owned by TP-JCM, LLC, a
limited liability company in which the sole member is the Company's
Chairman. In exchange for the stock of TPI, TP-JCM received 5,281,739
shares of the Company's Series B common stock, valued in the agreement at
$11.50 per share. As prescribed by the Agreement and Plan of Merger
pursuant to which the acquisition was effected, that per share value equals
110% of the average of the closing sale prices of the Company's Series A
common stock for the ten trading days ended November 28, 2003. TPI owns
10,602 shares of Series B Preferred Stock of Liberty TP Management, Inc.
("Liberty TP Management"), a subsidiary of the Company. Those shares of
Series B Preferred Stock represent 12% of the voting power of Liberty TP
Management. TPI also owns a 5% membership interest (representing a 50%
voting interest) in Liberty TP LLC, a limited liability company which owns
approximately 20.6% of the common equity and 27.2% of the voting power of
Liberty TP Management. As a result of the acquisition, the Company
beneficially owns all the equity and voting interests in Liberty TP
Management. Liberty TP Management owns our interest in True Position and
certain equity interests in Sprint Corporation, IDT Investments, Inc. and
priceline.com.
In connection with the acquisition of TPI, the Company entered into a
registration rights agreement. That agreement provides for the registration
by the Company under applicable federal and state securities laws, at the
holder's request, of the sale of shares of the Company's Series A common
stock issuable upon conversion of shares of the Series B common stock that
were issued to TP-JCM.
The shares of Liberty Series B common stock issued to TP-JCM are subject to
the Company's rights to purchase such shares pursuant to a call agreement
entered into in February 1998 by the Chairman and his spouse. Pursuant to
the call agreement, Liberty has the right to acquire all of the Liberty
Series B common stock held by the Chairman and his spouse in certain
circumstances. The price of acquiring such shares is generally limited to
the market price of the Liberty Series A common stock, plus a 10% premium.
(13) STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
LIBERTY
Pursuant to the Liberty Media Corporation 2000 Incentive Plan (the "Liberty
Incentive Plan"), the Company has granted to certain of its employees stock
options, stock appreciation rights ("SARs") and stock options with tandem
SARs (collectively, "Awards") to purchase shares of Liberty Series A and
Series B common stock. The Liberty Incentive Plan provides for awards to be
made in respect of a maximum of 160 million shares of common stock of
Liberty.
32
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
In connection with the Company's rights offering, which expired on December
2, 2002, and pursuant to the Liberty Incentive Plan antidilution
provisions, the number of shares and the applicable exercise prices of all
Liberty options granted pursuant to the Liberty Incentive Plan were
adjusted as of October 31, 2002, the record date for the rights offering.
As a result of the foregoing modifications, all of the Company's options
granted prior to October 31, 2002 are accounted for as variable plan
awards.
During the year ended December 31, 2003, Liberty awarded 4,601,000 free
standing SARs to its officers and employees with an exercise price of
$11.09 and 1,500,000 free standing SARs to its officers and employees with
an exercise price of $14.33. Such SARs have a 10-year term, vest as to 20%
on each of the first five anniversaries of the respective grant date, and
had a weighted average grant date fair value of $5.57 per share.
During the year ended December 31, 2004, Liberty awarded 4,011,450 free
standing SARs to its officers and employees. Such SARs have a 10-year term,
an exercise price of $8.45, vest as to 20% on each of the first five
anniversaries of the respective grant date, and had a weighted average
grant date fair value of $4.36 per share.
On December 17, 2002, shareholders of the Company approved the Liberty
Media Corporation 2002 Nonemployee Director Incentive Plan (the "NDIP").
Under the NDIP, the Liberty Board of Directors (the "Liberty Board") has
the full power and authority to grant eligible nonemployee directors stock
options, SARs, stock options with tandem SARs, and restricted stock.
Effective September 9, 2003, the Liberty Board granted each nonemployee
director of Liberty 11,000 free standing SARs at an exercise price of
$11.85. These options expire 10 years from the date of grant, vest on the
first anniversary of the grant date and had a grant date fair value of
$5.93 per share.
Effective June 1, 2004, the Liberty Board granted each nonemployee director
of Liberty 11,000 free standing SARs at an exercise price of $11.00. The
options expire 10 years from the date of grant, vest on the first
anniversary of the grant date and had a grant date fair value of $5.84 per
share.
The estimated fair values of the options noted above are based on the
Black-Scholes model and are stated in current annualized dollars on a
present value basis. The key assumptions used in the model for purposes of
these calculations generally include the following: (a) a discount rate
equal to the 10-year Treasury rate on the date of grant; (b) a 32%
volatility factor; (c) the 10-year option term; (d) the closing price of
the respective common stock on the date of grant; and (e) an expected
dividend rate of zero.
In connection with the Spin Off and pursuant to the anti-dilution
provisions of the Liberty Incentive Plan, the Liberty incentive plan
committee determined to make adjustments to outstanding Liberty Awards. As
of the Record Date, each outstanding Award held by (1) employees of LMI,
(2) employees of Liberty in departments of Liberty that were expected to
provide services to LMI pursuant to the Facilities and Services Agreement
and (3) directors of Liberty were divided into (A) an option to purchase
shares of LMI common stock equal to 0.05 times the number of LMC Awards
held by the option holder on the Record Date and (B) an Award to purchase
shares of Liberty common stock equal to the same number of shares of
Liberty common stock for which the outstanding Award was exercisable. The
aggregate exercise price of each pre-Spin Off Award was allocated between
the new Liberty Award and the LMI Award. All other Awards were adjusted to
increase the number of shares of Liberty common stock for which the Award
was exercisable and to decrease the exercise price to reflect the dilutive
effect of the distribution of LMI common stock in the Spin Off.
Pursuant to the Reorganization Agreement Liberty is responsible for
settlement of all Liberty Awards whether held by Liberty employees or LMI
employees, and LMI is responsible for
33
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
settlement of all LMI Awards whether held by Liberty employees or LMI
employees. Liberty will continue to record compensation for all Liberty and
LMI Awards held by Liberty employees. The compensation for LMI Awards will
be reflected as an adjustment to additional paid-in capital in Liberty's
statement of stockholders' equity.
The following table presents the number and weighted average exercise price
("WAEP") of certain options, SARs and options with tandem SARs to purchase
Liberty Series A and Series B common stock granted to certain officers,
employees and directors of the Company.
LIBERTY LIBERTY
SERIES A SERIES B
COMMON COMMON
STOCK WAEP STOCK WAEP
-------- ---- -------- ----
numbers of options in thousands
Outstanding at January 1, 2002 47,659 $ 11.69 27,462 $ 15.35
Granted 525 $ 12.38 --
Exercised (488) $ 3.51 --
Canceled (995) $ 25.70 --
Options issued in mergers 744 $ 34.55 --
Adjustments pursuant to antidilution
provisions 1,216 703
------- -------
Outstanding at December 31, 2002 48,661 $ 9.60 28,165 $ 14.96
Granted 6,233 $ 11.88 --
Exercised (323) $ 4.68 --
Canceled (619) $ 17.22 --
Options issued in mergers 1,142 $ 78.53 --
------- -------
Outstanding at December 31, 2003 55,094 $ 11.23 28,165 $ 14.96
Granted 4,078 $ 8.54 --
Exercised (2,060) $ 2.13 --
Canceled (5,457) $ 13.32 --
Adjustments related to Spin Off 4,321 --
------- -------
Outstanding at December 31, 2004 55,976 $ 9.15 28,165 $ 12.94
======= =======
Exercisable at December 31, 2002 30,402 $ 6.78 8,450 $ 14.96
======= =======
Exercisable at December 31, 2003 34,529 $ 9.12 13,378 $ 14.96
======= =======
Exercisable at December 31, 2004 37,558 $ 8.18 18,307 $ 12.94
======= =======
Vesting period 5 yrs 5 yrs
The following table provides additional information about the Company's
outstanding options to purchase Liberty Series A common stock at December
31, 2004.
NO. OF WEIGHTED NO. OF
OUTSTANDING RANGE OF WAEP OF AVERAGE EXERCISABLE WAEP OF
OPTIONS EXERCISE OUTSTANDING REMAINING OPTIONS EXERCISABLE
(000'S) PRICES OPTIONS LIFE (000'S) OPTIONS
----------- ---------------- ----------- --------- ----------- ----------
18,927 $ 0.88 - $ 3.39 $ 1.64 0.8 years 18,927 $ 1.64
6,433 $ 5.60 - $ 9.19 $ 8.23 7.3 years 913 $ 6.32
29,158 $10.04 - $ 14.14 $ 11.93 6.6 years 16,524 $ 12.26
1,458 $19.56 - $251.69 $ 54.91 5.3 years 1,194 $ 57.04
------- -------
55,976 37,558
======= ========
34
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
QVC
QVC has a qualified and nonqualified combination stock option/stock
appreciation rights plan (collectively, the "Tandem Plan") for employees,
officers, directors and other persons designated by the Stock Option
Committee of QVC's board of directors. Under the Tandem Plan, the option
price is generally equal to the fair market value, as determined by an
independent appraisal, of a share of the underlying common stock of QVC at
the date of the grant. The fair value of a share of QVC common stock as of
the latest valuation date is $2,491. If the eligible participant elects the
SAR feature of the Tandem Plan, the participant receives 75% of the excess
of the fair market value of a share of QVC common stock over the exercise
price of the option to which it is attached at the exercise date. The
holders of a majority of the outstanding options have stated an intention
not to exercise the SAR feature of the Tandem Plan. Because the exercise of
the option component is more likely than the exercise of the SAR feature,
compensation expense is measured based on the stock option component. As a
result, QVC is applying fixed plan accounting in accordance with APB
Opinion No. 25. Under the Tandem Plan, option/SAR terms are ten years from
the date of grant, with options/SARs generally becoming exercisable over
four years from the date of grant. At December 31, 2004, there were a total
of 168,139 options outstanding, 44,627 of which were vested at a weighted
average exercise price of $1,142 and 123,512 of which were unvested at a
weighted average exercise price of $1,970. During the year ended December
31, 2004, QVC received cash proceeds from the exercise of options
aggregating $39 million. In 2004, QVC also repurchased shares of common
stock issued upon exercise of stock options in prior years. Cash payments
aggregated $168 million for these repurchases.
As of December 31, 2004, Liberty had granted to certain officers and
employees of QVC a total of 9,847,391 restricted shares of Liberty Series A
common stock. Such shares generally vest as to 33% on each of January 1,
2005, 2006 and 2007.
STARZ ENTERTAINMENT
Starz Entertainment has outstanding Phantom Stock Appreciation Rights
("PSARS") held by certain of its officers and employees (including its
former chief executive officer). PSARS granted under the plan generally
vest over a five year period. Compensation under the PSARS is computed
based upon the percentage of PSARS that are vested and a formula derived
from the estimated fair value of the net assets of Starz Entertainment. All
amounts earned under the plan are payable in cash, Liberty common stock or
a combination thereof. At December 31, 2004 the amount accrued for Starz
Entertainment PSARs was $122 million.
Effective December 27, 2002, the former chief executive officer of Starz
Entertainment elected to exercise 54% of his outstanding PSARS. In July
2003, Starz Entertainment satisfied the amount due the officer with a cash
payment of $287 million.
OTHER
Certain of the Company's other subsidiaries have stock based compensation
plans under which employees and non-employees are granted options or
similar stock based awards. Awards made under these plans vest and become
exercisable over various terms. The awards and compensation recorded, if
any, under these plans is not significant to Liberty.
(14) EMPLOYEE BENEFIT PLANS
Liberty is the sponsor of the Liberty Media 401(k) Savings Plan (the
"Liberty 401(k) Plan"), which provides its employees and the employees of
certain of its subsidiaries an opportunity for ownership in the Company and
creates a retirement fund. The Liberty 401(k) Plan provides for employees
to make contributions to a trust for investment in Liberty common stock, as
well as several mutual funds. The Company and its subsidiaries make
matching contributions to the Liberty 401(k) Plan based on a percentage of
the amount contributed by employees. In addition, certain of the Company's
subsidiaries have similar employee benefit plans. Employer cash
contributions to all plans aggregated $23 million, $12 million and $7
million for the years ended December 31, 2004, 2003 and 2002, respectively.
35
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(15) OTHER COMPREHENSIVE EARNINGS (LOSS)
Accumulated other comprehensive earnings (loss) included in Liberty's
consolidated balance sheets and consolidated statements of
stockholders' equity reflect the aggregate of foreign currency
translation adjustments and unrealized holding gains and losses on AFS
Securities. The change in the components of accumulated other
comprehensive earnings (loss), net of taxes, is summarized as follows:
ACCUMULATED
FOREIGN UNREALIZED OTHER
CURRENCY HOLDING COMPREHENSIVE
TRANSLATION GAINS (LOSSES) EARNINGS (LOSS),
ADJUSTMENTS ON SECURITIES NET OF TAXES
------------ -------------- ----------------
amounts in millions
Balance at January 1, 2002 $ (384) 1,364 980
Other comprehensive loss 68 (555) (487)
------ ------ ------
Balance at December 31, 2002 (316) 809 493
Other comprehensive earnings 35 2,713 2,748
------ ------ ------
Balance at December 31, 2003 $ (281) 3,522 3,241
Other comprehensive earnings 23 1,002 1,025
Contribution to LMI -- (51) (51)
Other activity 9 (9) --
------ ------ ------
Balance at December 31, 2004 $ (249) 4,464 4,215
====== ====== ======
Included in Liberty's accumulated other comprehensive earnings (loss) at
December 31, 2004 is $123 million, net of income taxes, of foreign currency
translation losses related to Cablevision, S.A. ("Cablevision"), a former
equity method investment of Liberty, and $186 million, net of income taxes,
of foreign currency translation losses related to Telewest Communications
plc ("Telewest"), another former equity method investment of Liberty.
Subsequent to December 31, 2004, Liberty disposed of its interests in
Cablevision and Telewest. Accordingly, in the first quarter of 2005,
Liberty will recognize in its statement of operations approximately $510
million of foreign currency translation losses (before income tax benefits)
related to Cablevision and Telewest that were previously included in
accumulated other comprehensive earnings (loss).
36
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
The components of other comprehensive earnings (loss) are reflected in
Liberty's consolidated statements of comprehensive earnings (loss) net of
taxes. The following table summarizes the tax effects related to each
component of other comprehensive earnings (loss).
TAX
BEFORE-TAX (EXPENSE) NET-OF-TAX
AMOUNT BENEFIT AMOUNT
---------- -------- ----------
amounts in millions
YEAR ENDED DECEMBER 31, 2004:
Foreign currency translation adjustments $ 38 (15) 23
Unrealized holding losses on securities arising during period 2,443 (953) 1,490
Reclassification adjustment for losses realized in net loss (800) 312 (488)
------- ------- -------
Other comprehensive earnings $ 1,681 (656) 1,025
======= ======= =======
YEAR ENDED DECEMBER 31, 2003:
Foreign currency translation adjustments $ 57 (22) 35
Unrealized holding gains on securities arising during period 5,477 (2,136) 3,341
Reclassification adjustment for gains realized in net loss (1,030) 402 (628)
------- ------- -------
Other comprehensive earnings $ 4,504 (1,756) 2,748
======= ======= =======
YEAR ENDED DECEMBER 31, 2002:
Foreign currency translation adjustments $ 111 (43) 68
Unrealized holding losses on securities arising during period (6,808) 2,655 (4,153)
Reclassification adjustment for losses realized in net loss 5,898 (2,300) 3,598
------- ------- -------
Other comprehensive loss $ (799) 312 (487)
======= ======= =======
(16) TRANSACTIONS WITH RELATED PARTIES
Starz Entertainment pays Revolution Studios ("Revolution"), an equity
affiliate, fees for the rights to exhibit films produced by Revolution.
Payments aggregated $99 million, $91 million and $49 million in 2004, 2003
and 2002, respectively.
(17) COMMITMENTS AND CONTINGENCIES
FILM RIGHTS
Starz Entertainment, a wholly-owned subsidiary of Liberty, provides premium
video programming distributed by cable operators, direct-to-home satellite
providers and other distributors throughout the United States. Starz
Entertainment has entered into agreements with a number of motion picture
producers which obligate Starz Entertainment to pay fees ("Programming
Fees") for the rights to exhibit certain films that are released by these
producers. The unpaid balance of Programming Fees for films that were
available for exhibition by Starz Entertainment at December 31, 2004 is
reflected as a liability in the accompanying consolidated balance sheet.
The balance due as of December 31, 2004 is payable as follows: $200 million
in 2005 and $16 million in 2006.
Starz Entertainment has also contracted to pay Programming Fees for films
that have been released theatrically, but are not available for exhibition
by Starz Entertainment until some future date. These amounts have not been
accrued at December 31, 2004. Starz Entertainment's estimate of amounts
payable under these agreements is as follows: $538 million in 2005; $256
million in 2006; $125 million in 2007; $108 million in 2008; $98 million in
2009; and $134 million thereafter.
In addition, Starz Entertainment is also obligated to pay Programming Fees
for all qualifying films that are released theatrically in the United
States by studios owned by The Walt Disney Company ("Disney") through 2009,
all qualifying films that are released theatrically in the United States by
studios owned by Sony Pictures Entertainment ("Sony") from 2005 through
2010 and all qualifying films released theatrically in the United States by
Revolution through 2006. Films are generally available to Starz
Entertainment for exhibition 10 - 12 months after their theatrical release.
The Programming Fees to be paid by Starz Entertainment are based on the
quantity and
37
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
the domestic theatrical exhibition receipts of qualifying films. As these
films have not yet been released in theatres, Starz Entertainment is unable
to estimate the amounts to be paid under these output agreements. However,
such amounts are expected to be significant.
In addition to the foregoing contractual film obligations, each of Disney
and Sony has the right to extend its contract for an additional three
years. If Sony elects to extend its contract, Starz Entertainment would be
required to pay Sony a total of $190 million in four annual installments of
$47.5 million. Sony is required to exercise this option by December 31,
2007. If made, Starz Entertainment's payments to Sony would be amortized
ratably as programming expense over the extension period beginning in 2011.
An extension of this agreement would also result in the payment by Starz
Entertainment of Programming Fees for qualifying films released by Sony
during the extension period. If Disney elects to extend its contract, Starz
Entertainment is not obligated to pay any amounts in excess of its
Programming Fees for qualifying films released by Disney during the
extension period.
GUARANTEES
Liberty guarantees Starz Entertainment's obligations under the Disney and
Sony output agreements. At December 31, 2004, Liberty's guarantees for
obligations for films released by such date aggregated $763 million. While
the guarantee amount for films not yet released is not determinable, such
amount is expected to be significant. As noted above Starz Entertainment
has recognized the liability for a portion of its obligations under the
output agreements. As this represents a commitment of Starz Entertainment,
a consolidated subsidiary of Liberty, Liberty has not recorded a separate
liability for its guarantees of these obligations.
At December 31, 2004, Liberty has guaranteed (Y)4.7 billion ($46 million)
of the bank debt of Jupiter Telecommunications Co., Ltd. ("J-COM"), a
former equity affiliate that provides broadband services in Japan.
Liberty's guarantees expire as the underlying debt matures and is repaid.
The debt maturity dates range from 2005 to 2018. Liberty's investment in
J-COM was attributed to LMI in the Spin Off. In connection with the Spin
Off, LMI has agreed to indemnify Liberty for any amounts Liberty is
required to fund under this guarantee.
In connection with agreements for the sale of certain assets, Liberty
typically retains liabilities that relate to events occurring prior to its
sale, such as tax, environmental, litigation and employment matters.
Liberty generally indemnifies the purchaser in the event that a third party
asserts a claim against the purchaser that relates to a liability retained
by Liberty. These types of indemnification guarantees typically extend for
a number of years. Liberty is unable to estimate the maximum potential
liability for these types of indemnification guarantees as the sale
agreements typically do not specify a maximum amount and the amounts are
dependent upon the outcome of future contingent events, the nature and
likelihood of which cannot be determined at this time. Historically,
Liberty has not made any significant indemnification payments under such
agreements and no amount has been accrued in the accompanying consolidated
financial statements with respect to these indemnification guarantees.
OPERATING LEASES
Liberty leases business offices, has entered into pole rental and satellite
transponder lease agreements and uses certain equipment under lease
arrangements. Rental expense under such arrangements amounted to $57
million, $36 million and $21 million for the years ended December 31, 2004,
2003 and 2002, respectively.
38
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
A summary of future minimum lease payments under noncancelable operating
leases as of December 31, 2004 follows (amounts in millions):
Years ending December 31:
2005 $ 36
2006 $ 25
2007 $ 15
2008 $ 12
2009 $ 10
Thereafter $ 18
It is expected that in the normal course of business, leases that expire
generally will be renewed or replaced by leases on other properties; thus,
it is anticipated that future lease commitments will not be less than the
amount shown for 2004.
LITIGATION
Liberty has contingent liabilities related to legal and tax proceedings and
other matters arising in the ordinary course of business. Although it is
reasonably possible Liberty may incur losses upon conclusion of such
matters, an estimate of any loss or range of loss cannot be made. In the
opinion of management, it is expected that amounts, if any, which may be
required to satisfy such contingencies will not be material in relation to
the accompanying consolidated financial statements.
(18) INFORMATION ABOUT LIBERTY'S OPERATING SEGMENTS
Liberty is a holding company, which through its ownership of interests in
subsidiaries and other companies, is primarily engaged in the electronic
retailing, media, communications and entertainment industries. Each of
these businesses is separately managed. Liberty identifies its reportable
segments as (A) those consolidated subsidiaries that represent 10% or more
of its consolidated revenue, earnings before income taxes or total assets
and (B) those equity method affiliates whose share of earnings represent
10% or more of Liberty's pre-tax earnings. The segment presentation for
prior periods has been conformed to the current period segment
presentation.
Liberty evaluates performance and makes decisions about allocating
resources to its businesses based on financial measures such as revenue,
operating cash flow, gross margin, average sales price per unit, number of
units shipped and revenue or sales per customer equivalent. In addition,
Liberty reviews non-financial measures such as average prime time rating,
prime time audience delivery, subscriber growth and penetration, as
appropriate.
Liberty defines operating cash flow as revenue less cost of sales,
operating expenses, and selling, general and administrative expenses
(excluding stock compensation). Liberty believes this is an important
indicator of the operational strength and performance of its businesses,
including each business's ability to service debt and fund capital
expenditures. In addition, this measure allows management to view operating
results and perform analytical comparisons and benchmarking between
businesses and identify strategies to improve performance. This measure of
performance excludes depreciation and amortization, stock compensation,
litigation settlements and restructuring and impairment charges that are
included in the measurement of operating income pursuant to GAAP.
Accordingly, operating cash flow should be considered in addition to, but
not as a substitute for, operating income, net income, cash flow provided
by operating activities and other measures of financial performance
prepared in accordance with GAAP. Liberty generally accounts for
intersegment sales and transfers as if the sales or transfers were to third
parties, that is, at current prices.
39
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
Liberty has identified the following consolidated subsidiaries as its
reportable segments:
o QVC--consolidated subsidiary that markets and sells a wide variety of
consumer products in the United States and several foreign countries,
primarily by means of televised shopping programs on the QVC networks
and via the Internet through its domestic and international websites.
o Starz Entertainment--consolidated subsidiary that provides premium
programming distributed by cable operators, direct-to-home satellite
providers and other distributors throughout the United States.
Liberty's reportable segments are strategic business units that offer
different products and services. They are managed separately because
each segment requires different technologies, distribution channels and
marketing strategies. The accounting policies of the segments that are
also consolidated subsidiaries are the same as those described in the
summary of significant policies.
PERFORMANCE MEASURES
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------------
2004 2003 2002
----------------------- ------------------------ -----------------------
OPERATING OPERATING OPERATING
CASH CASH CASH
REVENUE FLOW REVENUE FLOW REVENUE FLOW
------- -------- -------- -------- ------- --------
amounts in millions
QVC $5,687 1,230 1,973 434 -- --
Starz Entertainment 963 239 906 368 945 371
Corporate and Other 401 (30) 351 (77) 321 (54)
------ ------ ------ ------ ------ ------
Consolidated Liberty $7,051 1,439 3,230 725 1,266 317
====== ====== ====== ====== ====== ======
BALANCE SHEET INFORMATION
DECEMBER 31,
---------------------------------------------------------
2004 2003
------------------------- -------------------------
INVESTMENTS INVESTMENTS
TOTAL IN TOTAL IN
ASSETS AFFILIATES ASSETS AFFILIATES
------ ---------- ------ -----------
amounts in millions
QVC $14,314 78 13,824 77
Starz Entertainment 2,945 52 2,852 50
Corporate and Other 27,206 654 28,408 618
Discontinued operations 5,716 -- 9,141 --
------- ------- ------- -------
Consolidated Liberty $50,181 784 54,225 745
======= ======= ======= =======
40
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
The following table provides a reconciliation of segment operating cash
flow to loss from continuing operations before income taxes and minority
interest:
YEARS ENDED DECEMBER 31,
-----------------------------------------
2004 2003 2002
------- ------- -------
amounts in millions
Consolidated segment operating cash flow $ 1,439 725 317
Stock compensation (98) 91 46
Litigation settlement 42 -- --
Depreciation and amortization (658) (394) (274)
Impairment of long-lived assets -- (1,362) (103)
Interest expense (615) (508) (367)
Share of earnings (losses) of affiliates 15 7 (57)
Realized and unrealized gains (losses) on derivative
instruments, net (1,284) (661) 2,127
Gains (losses) on dispositions, net 1,406 1,126 (538)
Nontemporary declines in fair value of investments (129) (22) (5,806)
Other, net 106 111 174
------- ------- -------
Earnings (loss) from continuing operations before
income taxes and minority interest $ 224 (887) (4,481)
======= ======= =======
REVENUE BY GEOGRAPHIC AREA
Revenue by geographic area based on the location of customers is as
follows:
YEARS ENDED DECEMBER 31,
------------------------------------
2004 2003 2002
------ ------ ------
amounts in millions
United States $5,424 2,741 1,235
Foreign countries 1,627 489 31
------ ------ ------
Consolidated Liberty $7,051 3,230 1,266
====== ====== ======
LONG-LIVED ASSETS BY GEOGRAPHIC AREA
DECEMBER 31,
---------------------
2004 2003
------ ------
amounts in millions
United States $ 770 794
Foreign countries 363 325
------ ------
Consolidated Liberty $1,133 1,119
====== ======
41
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(19) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
--------- -------- ------- --------
amounts in millions,
except per share amounts
2004:
Revenue $ 1,606 1,641 1,632 2,172
======= ===== ===== ======
Operating income $ 210 178 152 185
======= ===== ===== ======
Earnings (loss) from continuing operations $ 71 (334) 359 4
======= ===== ===== ======
Net earnings (loss) $ (10) (314) 372 (2)
======= ===== ===== ======
Basic and diluted earnings (loss) from continuing
operations per common share $ .02 (.11) .13 --
======= ===== ===== ======
Basic and diluted net earnings (loss) per common share $ -- (.11) .13 --
======= ===== ===== ======
2003:
Revenue $ 319 304 712 1,895
======= ===== ===== ======
Operating income (loss) $ 12 (42) 153 (1,063)
======= ===== ===== ======
Earnings (loss) from continuing operations $ 140 (476) 38 (931)
======= ===== ===== ======
Net earnings (loss) $ 132 (464) 41 (931)
======= ===== ===== ======
Basic and diluted earnings (loss) from continuing
operations per common shares $ .05 (.16) .01 (.33)
======= ===== ===== ======
Basic and diluted net earnings (loss) per common share $ .05 (.16) .01 (.33)
======= ===== ===== ======
42